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Open Access research with a European policy impact...

The Strathprints institutional repository is a digital archive of University of Strathclyde's Open Access research outputs. Strathprints provides access to thousands of Open Access research papers by Strathclyde researchers, including by researchers from the European Policies Research Centre (EPRC).

EPRC is a leading institute in Europe for comparative research on public policy, with a particular focus on regional development policies. Spanning 30 European countries, EPRC research programmes have a strong emphasis on applied research and knowledge exchange, including the provision of policy advice to EU institutions and national and sub-national government authorities throughout Europe.

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The happy story of small business financing

Vos, Ed and Yeh, Andy Jia-Yuh and Carter, Sara L. and Tagg, Stephen K. (2007) The happy story of small business financing. Journal of Banking and Finance, 31 (9). pp. 2648-2672. ISSN 0378-4266

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Abstract

We examine two data sets, one from the UK (n = 15,750) and one from the US (n = 3239), to show that SME financial behaviour demonstrates substantial financial contentment, or 'happiness'. We find fewer than 10% of the UK firms seek significant growth and only 1.32% of US firms list a shortage of capital other than working capital as a problem. Financial performance indicators (growth, return on assets, profit margin) were not found to be determinants of SME financing activities, as might be expected in a 'rational' risk-return environment. Younger and less educated SME owners more actively use external financing - even though more education reduces the fear of loan denial - while older and more educated ('wiser') SME owners are found to be being less likely to seek or use external financing. The contentment hypothesis for SME financing also extends to high-growth firms in that we show that they participate more in the loan markets than low-growth firms. By way of contrast to the finance gap hypothesis, the contentment hypothesis observes the importance of social networks (connections) [for finance] and confirms the 'connections - happiness' linkage in the literature on happiness while doubting the theoretical suitability of Jensen and Meckling [Jensen, M., Meckling, W., 1976. Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics 3, 305-360.] base-case analysis for SMEs.