SME Creditworthiness and Financing: Firm Size Effects

The thesis profiles SME access to finance for more than 31,000 firms in high-income and emerging markets, with financial accounting data for more than 15,000 emerging markets firms. SMEs account for nearly 40% of the total sample. The author finds (1) bank credit allocation favoring large-scale businesses versus SMEs is rational due to large firms' positive financial performance indicators, fees paid, disclosure practices and market power (demand side) as well as creditor operational efficiency and cost effectiveness from lending economies of scale (supply side); (2) despite this, large-scale lenders have an interest in financing SMEs for portfolio diversification and management of concentration risk, while mid-sized lenders often provide credit to SMEs due to the lender's more limited capital and/or business model orientation as a "stakeholder" institution; (3) standard financial performance metrics focused on earnings efficiency (EBIT/ASSETS), financial slack (Net Working Capital/ASSETS) and tangible fixed assets that can be pledged as collateral have moderate to low explanatory power for bank credit access patterns, whereas loan covenant indicators (DEBT/EBITDA and Interest Coverage) have high R-squares, even for LTD access; (4) tangible fixed assets (immoveable and moveable) show a weaker relationship to credit access for firms than expected; and (5) small-scale firms have greater immoveable assets than are commonly assumed, while large-scale firms have less immoveable asset value and more moveable asset value on their balance sheets than commonly assumed, which may impact collateral values for credit access. Weakness in moveable property registries makes it harder for firms to value and pledge machinery and equipment as assets for secured transactions. Correspondingly, SMEs are constrained in their access to credit, particularly LTD, because the legal and institutional environment works against them due to their dependence on machinery and equipment for operations and because these are the predominant fixed assets they have to pledge as collateral. Despite this, positive correlation of markets with high credit access and strong legal and institutional variables shows firms in stronger environments for credit information, minority shareholder protection, regulatory effectiveness, property registration, contract enforcement and insolvency resolution have better chances of accessing credit (consistent with institutional theory).