Alan Hudges and David J. Storey (ed.) (1994).
Finance and the Small Firm, edited by London:
Routledge. ISBN 0-415-10036-4.
This collection of eight essays deals with the
subject of small business in the modern economy.
These studies were prepared with support from the
Economic and Social Research Council’s Small
Business Research Program, Barclays Bank, the
Commission of the European Communities, and
the [British] Department of Trade and Industry and
the Rural Development Commission. The essays
cover the main issues concerning small businesses
in the United Kingdom.
Small businesses are portrayed as the main
drivers of economic growth and employment, the
source of much innovation, and a significant ingre-
dient in market competition and the promotion of
efficiency. Furthermore, the international compet-
itiveness of a country in the long run depends on
the viability and prosperity of small businesses.
Now, anecdotal evidence suggests that the
business cycle has more of an influence on small
firms more than on large ones. Both a prolonged
recession or weak economic recovery have been
credited with wiping out the economic and insti-
tutional structures that sustain small businesses.
After reviewing the recent finance literature,
several of the researchers in this book tested their
theories for different sized firms. According to
Acs (1994), the existing theories of finance focus
on the behavior of large publicly traded com-
panies, usually in the manufacturing sector, rather
than small firms, usually in the services sector.
While firms employing less than 500 employees
are generally considered “small” or “medium
sized,” firms with less than 10 employees are
sometimes called “microenterprises.” The applic-
ability of the existing finance theories to small and
especially to microenterprises has been questioned
by many researchers, including Levy (1993), Reid
(1993), and Cosh and Hughes (1993). Now, more
than two thirds of all small firms in both the U.S.
and the U.K. are microenterprises, and almost half
of them are sole proprietorships, or partnerships
and not corporations. Thus most of the small firms
are owner-controlled (or manager-owned). Even
though Shailer (1993) indicates the irrelevance of
organizational structure, further analysis in this
area is required.
Empirical research in small-business economics
has been rather sparse because the size distribu-
tion data was not available prior to the 1980s. The
Board of Governors of the Federal Reserve System
(Fed) and the Small Business Administration
(SBA) in the U.S. have sponsored two major
national surveys carried out in 1991 by the
Cambridge University Small Business Research
Centre in the U.K. Even though the quality of data
in these surveys may not be at the level of publicly
available data for the large corporations in both
the U.S. and U.K., these research efforts still offer
significant opportunities to economists, special-
izing in small business economics.
Most small firms, especially microenterprises,
in the establishment and development stages are
perceived as “risky.” Credit institutions ask for a
significant amount of collateral for short-term
loans and totally ration long-term loans to small
businesses. This is because of asymmetric infor-
mation problems and capital market imperfections.
Otero and Ryne (1995) explained the reasons for
credit constraints and the involvement of the
World Bank and the U.S. Agency for International
Development in a project called “GEMINI.” This
project aimed at mitigating asymmetric informa-
tion problems between credit institutions and
microenterprises, especially in developing coun-
tries (Otero and Rhyne, 1995).
Small firms have had their access to equity
markets limited by the substantial cost involved in
“going public” or other related institutional restric-
tions, such as audit and disclosure requirements
and expenses. In addition to the “equity gap” on
the supply side, Hutchinson (1995) points to the
possibility of “equity aversion” on the demand
Small Business Economics
9: 539–541, 1997.