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Small Business Economics | 1997

European SME Financing: An Overview

Robert Cressy; Christer Olofsson

This Special Issue constitutes an edited selection from the papers of a conference Financing SMEs, sponsored by Sweden’s NUTEK and held in Brussels in September 1995. The conference program was structured to include a significant proportion of the papers by policy-makers from both the public and the private sectors, the remainder to be contributed by the academics. Some 50 participants from seven European countries attended over a two day period and 14 papers were presented. The purpose of the present volume is to present an edited selection of the more academically oriented papers to the readers of Small Business Economics.


The Economic Journal | 2002

INTRODUCTION: FUNDING GAPS:

Robert Cressy

Theoretical and empirical foundations of government policies to plug alleged business funding gaps are highly controversial but rarely subject to wide-ranging in-depth debate. This symposium from major scholars in the field provides a counterbalance. Topics addressed cover the theory of lending under asymmetric information; its implications for overlending; relationship lending as a market solution to information asymmetries; government emulation of private sector decision-making to eliminate underprovision of high tech equity and theoretically-based empirical work testing for funding deficiencies in the high tech sector. Despite the very different and potentially contradictory contributions the result is, surprisingly, a set of mutually agreed policy conclusions.


Small Business Economics | 1997

The Financial Conditions for Swedish SMEs: Survey and Research Agenda

Robert Cressy; Christer Olofsson

This paper shows that in two important sectors of Swedish industry in the early 1990s the existence of finance demand (internally generated) constraints in addition to the familiar finance supply (externally generated) constraints on businesses are a significant empirical phenomenon. Firms are aware that relinquishing some control would improve performance. However, the returns in growth, profits and survival are not sufficient to offset the utility of control loss. Owners of younger firms, especially in Business Services, regard very favourably the added expertise of new (preferably angel) equity holders, with one in three such firms having actively sought new owners. Equity finance is therefore to be regarded as a ‘package’ from the viewpoint of the smaller firm, with transfer of management skills from venture capitalist to firm sweetening the bitter pill of control-loss.


Economics Letters | 2000

Credit rationing or entrepreneurial risk aversion? An alternative explanation for the Evans and Jovanovic finding

Robert Cressy

Abstract Evans and Jovanovic (‘EJ’) [Evans, D., Jovanovic, B., 1989. An estimated model of entrepreneurial choice under liquidity constraints. Journal of Political Economy 97 (4), 808–827.] claimed that in a credit market with collateral-based lending, credit rationing occurs if more collateral increases startups. Adjusting the model to incorporate uncertainty and decreasing absolute risk aversion, this relationship can be explained as a risk averter’s response to the lowered riskiness of self- over wage-employment.


Venture Capital: An International Journal of Entrepreneurial Finance | 2001

Is there adverse selection in the credit market

Robert Cressy; Otto Toivanen

Despite a huge theoretical literature on credit markets charaterized by asymmetric information little is known about the structure of real world credit contracts or the nature of the underlying informational regime on which they are predicated. A model is constructed and tested that enables delineation of credit contract features and establishment of the nature of the underlying informational regime. Large sample estimates based on individual loans from a major UK bank are shown to support both the symmetric and asymmetric information variants of the model: better borrowers get larger loans and lower interest rates; collateral provision and loan size reduce the interest rate paid. However, consistent with a regime of symmetric information collateral levels are found to be independent of borrower type. Finally, in line with the insurance literature, the bank is shown to use qualitative as well as quantitative information in the structuring of loan contracts to small businesses.


Small Business Economics | 1996

Pre-entrepreneurial income, cash-flow growth and survival of startup businesses: Model and tests on U.K. data

Robert Cressy

A target income/human capital model of startup survival and growth is derived and tested. The objective of the entrepreneur is to produce an independent source of income for him/herself to replace income from previous employment. Target income is a function of pre-entrepreneurial income and human capital represented by age. The model predicts that higher pre-income entrepreneurs and more mature individuals will grow faster to achieve these targets and that growth is an ambiguous function of size. It also predicts that these same individuals, and businesses that start larger, will be more likely to survive. The key results of the empirical analysis are that (a) businesses run by proprietors with higher pre-entrepreneurial incomes do indeed grow faster than other startups but have no greater survival prospects, and (b) businesses run by mature proprietors possess greater longevity. We conclude that business income targets in practice constitute a significant motivation for startup growth, and that the human capital represented by age plays no additional role. However, proprietor age rather than pre-income determines survival, despite the fact that pre-income and age are positively correlated both with each other and with growth.


Archive | 2000

Risk behaviour and risk management in business life

Bo Green; Robert Cressy

1: Cross the borders. 1.1. Introduction. 1.2. A case of communication failure in a socio-technical system - The Kegworth incident. 1.3. Multidisciplinary research into risk and risk management. 1.4. Interdisciplinary risk research in credit. 1.5. Reflections on the multidisciplinary nature of research into risk in banking. 1.6. Reflections on the need for an interdisciplinary approach to the study of insolvency risk. 1.7. Reflections on how to introduce doctoral students to the complex scientific field of risky business. 1.8. Psychological perspectives on risk management. 1.9. Why is it important for researchers to study complex systems in our world from an interdisciplinary approach? 1.10. Reflections on the need for a holistic view in research projects. 1.11. Analysis of complex systems related to business conditions. 2: Risk assessment and credit management. 2.1. Introduction. 2.2. Risk measurement and management - implementing quantitative models assessing capital at risk in a traditional banking environment. 2.3. The decentralised loan organisation. 2.4. A credit intelligence approach to service design in banks. 2.5. Knowledge-based decision systems for the management of small business risks. 2.6. Trade credit in Europe today - Credit cultures, payment morality and legal systems. 2.7. Demand for credit and influences on payment behaviour. 2.8. The next property cycle: a survival kit for banks. 2.9. Uncertainty in real estate appraisals. 2.10. Leasing and property risk: The South Australian experience. 3: Psychology in business life. 3.1. Introduction.3.2. The development of conversation-based process tracing methods for the study of naturalistic decision making. 3.3. Reflective versus nonreflective decision making: The case of credit decisions in business. 3.4. Trust between entrepreneurs and external actors. 3.5. Social/psychological barriers to successful management of technological innovation. 3.6. The impact of non-financial factors on the decision making by credit assessors dealing with the threat of insolvency. 3.7. Business risks in service companies due to poor temporal assessment. 3.8. Task characteristics and expertise. 3.9. Why do experts disagree? 4: Innovation, growth and entrepreneurship. 4.1. Introduction. 4.2. Towards a better understanding of risk in entrepreneurial decision making. 4.3. The characteristics of high-growth firms and their job contribution. 4.4. The assessment of business opportunities -- A comparison between informal investors and institutional venture capitalists. 4.5. Innovation strategy and management control systems: linking long-term objectives with short-term actions. 5: Loan guarantee schemes in risk management. 5.1. Introduction. 5.2. European union enterprise policy and loan guarantee schemes. 5.3. European loan guarantee schemes. 5.4. Government guarantee schemes in Europe: Who has them? Who pays? Who gains? 6: Insolvency risks and the role of insolvency law. 6.1. Introduction. 6.2. Does a Reorganisation Law improve the efficiency of the Insolvency Law? The Finnish experience. 6.3. Should we abolish Chapter 11: Evidence from Canada. 6.4. Cash Auction Bankruptcy: Summary o


Small Business Economics | 1999

The Evans and Jovanovic Equivalence Theorem and Credit Rationing: Another Look

Robert Cressy

In their well-known paper on liquidity constraints, Evans and Jovanovic (1989), argue that under certain assumptions an equivalence relation exists between the probability of switching from wage- into self-employment and assets of the entrepreneur. That is, if and only if there are liquidity constraints is the probability of switching a function of the individuals assets. The present paper amends this proposition by showing in a simple diagram that if the probability of switching depends on assets then capital constraints are implied in their model; but not vice versa. This apparently trivial correction is shown to have important implications for empirical work. Under some circumstances alternative tests need to be employed to establish the existence or otherwise of credit rationing. One such test is discussed.


Social Science Research Network | 2000

Lazy Entrepreneurs or Dominant Banks? An Empirical Analysis of the Market for SME Loans in the UK

Otto Toivanen; Robert Cressy

An encompassing model of a business loan contract with the bank is constructed to establish the roles and relative importance of asymmetry of information, market power, borrower (entrepreneurial) effort and quality in explaining contract features. Special cases of the model include symmetric versus asymmetric information regimes, competition versus monopoly power, adverse selection versus moral hazard. The model is tested on a large SME database from a large UK bank. Results indicate that the model is a good description of the data; that the bank has considerable market power; and that there is moral hazard but no adverse selection in the market


Small Business Economics | 1992

The theory of the opportunistic entrepreneur

Robert Cressy

Most recent theories of entrepreneurship advanced in the literature have been concerned with de novo business starts involving the entrepreneur in a once-off product decision. The question of the entrepreneurs learning from business experience is therefore ignored (an exception being Jovanovic, 1982). The present paper departs from the literature by providing a theory of entrepreneurial opportunism which allows the individual to receive a continuous sequence of projects in each of which he makes a decision to invest or not. Important features of the decision analysed are firstly that acceptance (as well as rejection) of projects has possible costs as well as returns; and secondly that there is scope for learning which products to accept on the basis of past experience of successes and failures. We thus show that it is possible to provide a convincing model of opportunistic entrepreneurial behaviour in conformity with the notion of an entrepreneur discussed in Kiam (1989).The model takes the form of the derivation of an optimal decision rule over project success probabilities which maximises the entrepreneurs expected return given his current knowledge. This rule tells the entrepreneur which projects to accept and which to reject. The optimal reservation probability is shown to be a function of the quality of the entrepreneurs data (the projects coming his way), of his ability to formulate the ‘correct’ model and to update that model as information accumulates. Finally we show how the optimal reservation probability responds to changes in the observable components of project quality: demand parameters, interest rates, and so no.

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Hisham Farag

University of Birmingham

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Bo Green

Stockholm University

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