Impact of the Global Crisis on SME Internal vs. External Financing in China

TL;DR

This study examines how the global financial crisis affected the internal and external financing of Chinese SMEs, revealing factors influencing leverage and highlighting the importance of government policy adjustments.

Contribution

It provides empirical evidence on the determinants of SME financing in China before and after the global crisis, focusing on internal versus external sources and their changes over time.

Findings

Leverage decreases with profitability, tax shields, and liquidity.

Leverage increases with firm size and tangibility.

High-growth SMEs find it easier to access external financing post-crisis.

Abstract

Changes in the capital structure before and after the global financial crisis for SMEs are studied, emphasizing their financing problems, distinguishing between internal financing and external financing determinants. The empirical research bears upon 158 small and medium-sized firms listed on Shenzhen and Shanghai Stock Exchanges in China over the period of 2004-2014. A regression analysis, along the lines of the Trade-Off Theory, shows that the leverage decreases with profitability, non-debt tax shields and the liquidity, and increases with firm size and tangibility. A positive relationship is found between firm growth and debt ratio, though not highly significantly. It is shown that the SMEs with high growth rates are those which will more easily obtain external financing after a financial crisis. It is recognized that the China government should reconsider SMEs taxation laws.