Impact of Market-Based Finance on SMEs Failure

28 Pages Posted: 17 Apr 2015 Last revised: 26 Feb 2018

See all articles by Jairaj Gupta

Jairaj Gupta

University of York

Andros Gregoriou

University of Brighton

Date Written: September 1, 2017


Capital Market-Based financing for Small and Medium-sized Enterprises (SMEs) is increasingly viewed as complementary to traditional bank-based financing for SMEs. In response, policymakers are recognising the need for better access of SMEs to capital markets and are making efforts to remove major impediments to their participation in capital markets. Thus, SMEs listed on stock exchanges benefit from better access to finance and reduced information asymmetry than their unlisted counterparts. This in turn shall lead to lower failure likelihood of listed SMEs. In this study, we empirically test this hypothesis and report that listed SMEs enjoy a lower likelihood of financial distress and bankruptcy than their unlisted counterparts. Although factors affecting financial distress of both listed and unlisted SMEs are almost identical, Average Marginal Effects of respective factors are strikingly higher for their unlisted counterparts. This suggests a higher vulnerability of unlisted SMEs due to changes in financial ratios. Due to the extremely low number of legal bankruptcy events, our hypothesis finds weak support when bankruptcy is used as the dependent variable in the regression analysis. Broadly, our findings support the view that stock exchange listing can relieve SMEs from external financing constraints, thus reducing their failure likelihood.

Keywords: Financial distress; Small and medium-sized enterprises; SMEs; Bankruptcy; Credit Risk

JEL Classification: G12, G32, G33

Suggested Citation

Gupta, Jairaj and Gregoriou, Andros, Impact of Market-Based Finance on SMEs Failure (September 1, 2017). Economic Modelling (Volume 69, January 2018, Pages 13-25), Available at SSRN: or

Jairaj Gupta (Contact Author)

University of York ( email )

University of York Management School
Church Lane Building
York, North Yorkshire YO10 5ZF
United Kingdom

Andros Gregoriou

University of Brighton ( email )

Brighton, BN2 4AT
United Kingdom

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