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The determinants of equity needs: size, youth or innovation?

Valeria Venturelli (University of Modena and Reggio Emilia and CEFIN – Centro Studi Banca e Finanza, Modena, Italy)
Elisabetta Gualandri (University of Modena and Reggio Emilia and CEFIN – Centro Studi Banca e Finanza, Modena, Italy)

Journal of Small Business and Enterprise Development

ISSN: 1462-6004

Article publication date: 23 October 2009

959

Abstract

Purpose

The purpose of this paper is to set out to critically review the approaches developed for the assessment of the equity gap, extending the quantitative approaches to the equity gap and developing a demand‐side model that allows accurate prediction of the future demand for equity.

Design/methodology/approach

The first part of the paper deals with financial constraints for innovative SMEs and the possible existence of an equity gap. The next step concentrates on calculating the additional amount of equity needed in order to finance the expected growth in sales.

Findings

With regard to the approaches developed to estimate the scale of the equity gap, our main finding is that demand‐side analysis is the least well developed. Through the application of an original model to a sample of Italian firms, we find that the degree of innovation cannot be considered the main discriminating factor when it comes to the differences in equity requirement per unit of marginal sale; the analysis reveals the pivotal role played by the enterprise's year of foundation.

Research limitations/implications

The empirical data considered in this paper are from a large database that does not cover the period before the company starts to sell its goods on the market; moreover, the estimation of the amount of equity needed cannot be considered explicit evidence of an equity gap problem, since the gap itself implies an unfulfilled demand for additional sources of finance, only measurable in qualitative terms.

Practical implications

The research will be of interest to policy makers and practitioners in defining appropriate mechanisms for bridging the equity gap for SMEs.

Originality/value

The attempts to quantify the scale of the equity gap at the international level have been limited by the availability of data. As a result, they have tended to be largely qualitative, and their conclusions anecdotal. The model presented here allows precise prediction of the future demand for equity: the results could indirectly confirm that there is indeed a gap in the availability of risk capital for SMEs.

Keywords

Citation

Venturelli, V. and Gualandri, E. (2009), "The determinants of equity needs: size, youth or innovation?", Journal of Small Business and Enterprise Development, Vol. 16 No. 4, pp. 599-614. https://doi.org/10.1108/14626000911000947

Publisher

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Emerald Group Publishing Limited

Copyright © 2009, Emerald Group Publishing Limited

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