An Instrument Variable Model of the Impact of Financing on Performance of Small Businesses in Australia Pre-Global Financial Crisis — Firm Level Empirical Analysis Using ABS Business Longitudinal Data 2007

27 Pages Posted: 1 Dec 2010 Last revised: 13 Feb 2011

See all articles by Yongqiang Li

Yongqiang Li

Victoria University - Victoria University of Technology

Anona Fern Armstrong

Victoria University

Andrew Clarke

affiliation not provided to SSRN

Date Written: November 30, 2010

Abstract

Firm level empirical research on the impact of financing decisions on small business performance is scarce in the Australian context. This study adopts an instrument variable (IV) approach to analysis the impact of financing decisions, in particular, equity or debt obtained, on the performance of small businesses using the panel data from ABS Business Longitudinal Database (BLD) 2004-05, 2005-06 and 2006-07. Performance variables, i.e. sales and expenditure, are used as dependent variables. Equity and debt obtained are used as independent variables (or known as treatments). Instrument variables include size of the business, age of the business, number of locations, industry division etc. The results from IV modelling outperformed that obtained from OLS.

Findings include: (1) financing have significantly positive impacts on the performance of small businesses in Australia; (2) equity and debt financing are used as alternatives; comparatively, equity financing is preferred; (3) capital purchase are largely funded by the debt financing, while noncapital purchases and salary expense are funded by the equity financing; (4) equity financing is more often used for firms with increasing capital purchases and declining noncapital purchases, while debt financing is used by firms with the opposite trends. The paper concludes with a discussion of the limitations of this research and future research directions.

Keywords: equity financing, debt financing, firm performance, empirical study

JEL Classification: C50

Suggested Citation

Li, Yongqiang and Armstrong, Anona Fern and Clarke, Andrew, An Instrument Variable Model of the Impact of Financing on Performance of Small Businesses in Australia Pre-Global Financial Crisis — Firm Level Empirical Analysis Using ABS Business Longitudinal Data 2007 (November 30, 2010). Finance and Corporate Governance Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1717732 or http://dx.doi.org/10.2139/ssrn.1717732

Yongqiang Li (Contact Author)

Victoria University - Victoria University of Technology ( email )

P.O. Box 14428
Melbourne, Victoria 8001
Australia

Anona Fern Armstrong

Victoria University ( email )

P.O. Box 600
Wellington, 6140
New Zealand

Andrew Clarke

affiliation not provided to SSRN ( email )

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