Does the Financial Crisis Change the Effect of Financing on Investment? Evidence From Private SMEs

Abstract

The paper examines the real effects of the financial crisis for private firms. Analyzing a novel dataset from the Netherlands and controlling for multiple key factors, we find that investments of small and medium-sized private enterprises reduced significantly during and after the financial crisis. We find that both internal and external financing sources had a significant positive relationship with investment during the pre-crisis and post-crisis periods. But, during the crisis period, internal finance became significantly less influential on investment compared to external finance. The findings of the study suggest that borrowing from banks played a more prominent role in determining the investments of SMEs during the financial crisis of 2008-2009.

Keywords: Financing; Investment; Financial crisis; SMEs; Private firms

JEL Classification: G01; G21; G32; D22.