Small and Medium Size Enterprise Financing: A Note on Some of the Empirical Implications of a Pecking Order

22 Pages Posted: 17 May 2002

See all articles by Robert Watson

Robert Watson

Instituto de Empresa

Nick Wilson

University of Leeds - Credit Management Research Centre; Leeds University Business School

Abstract

Asymmetric information models predict a 'pecking order' which reflects a combination of owner-manager preferences and external capital supply constraints whenever insiders know more about the true value of the firm's prospects than outsiders. The pecking order results in retained earnings being the most preferred source of finance, then debt and finally the issue of new shares to outsiders. Using a sample of 629 UK SMEs over the five-year period from 1990 to 1995 we find evidence consistent with a pecking order in which retained equity is preferred over debt. As expected, the evidence of a pecking order was particularly strong in respect of the closely-held firms in our sample.

Suggested Citation

Watson, Robert and Wilson, Nicholas, Small and Medium Size Enterprise Financing: A Note on Some of the Empirical Implications of a Pecking Order. Available at SSRN: https://ssrn.com/abstract=312720

Robert Watson (Contact Author)

Instituto de Empresa ( email )

Serrano 99
Madrid, 28006
Spain

Nicholas Wilson

University of Leeds - Credit Management Research Centre ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

Leeds University Business School ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 4472 (Phone)

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