Cost of capital in SMEs

Cost of capital in SMEs Purpose The purpose of this paper is to discuss the applicability of value based management VBM concepts for small to mediumsized enterprises SMEs and to identify obstacles for its implementation. Estimating cost of capital is central to all VBM concepts, it is hence intended to critically analyse approaches that allow estimating cost of capital for nonpublicly traded firms.Designmethodologyapproach The paper is based on literature review and a case study approach. A case study on estimating the cost of capital has been conducted with a single manufacturing firm in Germany.Findings VBM may provide useful management concepts for SMEs. Estimating the cost of capital has been found to be a critical element of implementing VBM concepts. Due to the absence of capital market data, cost of equity in SMEs has to be derived by means of alternative procedures. Results of a case study implicate that a combination of different methods may provide reasonable results in practice.Research limitationsimplications The applied research approach and the heterogeneity of the SME sector do not allow generalizing the results of this research.Originalityvalue The paper addresses a major barrier for implementing VBM in SMEs. It proposes a combination of analogy and qualitative approaches for estimating the cost of equity in SMEs. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png EuroMed Journal of Business Emerald Publishing

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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1450-2194
D.O.I.
10.1108/EMJB-05-2013-0017
Publisher site
See Article on Publisher Site

Abstract

Purpose The purpose of this paper is to discuss the applicability of value based management VBM concepts for small to mediumsized enterprises SMEs and to identify obstacles for its implementation. Estimating cost of capital is central to all VBM concepts, it is hence intended to critically analyse approaches that allow estimating cost of capital for nonpublicly traded firms.Designmethodologyapproach The paper is based on literature review and a case study approach. A case study on estimating the cost of capital has been conducted with a single manufacturing firm in Germany.Findings VBM may provide useful management concepts for SMEs. Estimating the cost of capital has been found to be a critical element of implementing VBM concepts. Due to the absence of capital market data, cost of equity in SMEs has to be derived by means of alternative procedures. Results of a case study implicate that a combination of different methods may provide reasonable results in practice.Research limitationsimplications The applied research approach and the heterogeneity of the SME sector do not allow generalizing the results of this research.Originalityvalue The paper addresses a major barrier for implementing VBM in SMEs. It proposes a combination of analogy and qualitative approaches for estimating the cost of equity in SMEs.

Journal

EuroMed Journal of BusinessEmerald Publishing

Published: Apr 26, 2013

Keywords: Cost of capital; Small to medium‐sized enterprises; Manufacturing industries; Germany; Value‐based management; Weighted average cost of capital; Capital asset pricing model

References

  • The cost of capital for projects: conceptual and practical issues
    Anderson, R.C.; Byers, S.S.; Groth, J.C.
  • Economic value added: a useful tool for SME performance management
    Bahri, M.; St‐Pierre, J.; Sakka, O.
  • Researching the Small Enterprise
    Curran, J.; Blackburn, R.A.
  • CAPM for estimating the cost of equity capital: interpreting the empirical evidence
    Da, Z.; Guo, R.‐J.; Jagannathan, R.
  • Equity risk premiums (ERP): determinants, estimation and implications
    Damodaran, A.
  • SMEs and CSR: an approach to CSR in their own words
    Murillo, D.; Lozano, J.M.
  • Estimating the cost of capital: considerations for small business
    Palliam, R.
  • The use of the accounting beta as an overall risk indicator for unlisted companies
    St.‐Pierre, J.; Bahri, M.
  • Estimating the cost of capital
    Ward, C.

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