The Economics of Small Business Finance: The Role of Private Equity and Debt Markets in the Financial Growth Cycle

Abstract:     
While large firms are financed through public, visible institutions such as the stock market, private firms are financed through less visible, information scarce means – e.g., private equity or debt financing. At different points in a firm's financial growth cycle – at different stages of firm size and age – forms of financing will vary. This analysis reviews the literature on small firm finance, discusses macroeconomic and public policy implications, and identifies a research agenda. Newly available data sources on small business finance, especially for the United States, are discussed. These new tools allow empirical testing of previous theories, resulting in changes in previous thought about such issues as the role of insider vs external sources of finance. The authors note that sources of finance are interconnected and complementary.

Keywords: Credit rationing, Growth cycle, Venture capital, Firm financing, Private equity, Debt financing, Banking industry, Economic research, Datasets, Capital structure

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