Loan availability and investment: can innovative companies better cope with loan denials?

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp10025.pdf Non-technical SummaryAccess to external financing is of high importance to companies for the financing of fixed investments. Investment in fixed assets occurs in irregular intervals and requires relatively large amounts of financing, whereas internal financing from cash flow accrues more continuously. For large investment projects internal financing is therefore unlikely to be sufficient. Bank financing is especially important for small and medium-sized enterprises (SMEs), because they have no access to either the public equity market or to the corporate bond market. When companies apply for loans they are not sure whether they will actually receive financing. So far, little is known about how companies adjust their investment volume in case desired loans turn out to be unavailable. It is also not known which financing mix companies choose for the investment they are able to realize.Our main focus is on differences between innovative and non-innovative companies. Whereas debt financing is less well suited for innovative companies due to the higher uncertainty regarding their returns, equity financing has the advantage of the financier participating in the upside potential of the company. Innovative companies may be better able to cope with loan denials if they are able to substitute external equity for unavailable bank loans.The analysis is based on an annual company survey conducted by KfW Bankengruppe that is representative of German SMEs. We build on more than 4,500 observations relating to the years 2005 to 2007. The survey is unique in that it provides detailed information on planned investment, actual investment, experience with loan applications and innovative activities.Econometrically we control for the non-randomness of loan denials by estimating a selection equation for loan denials. We use the intensity of banking competition at the district level as an exclusion restriction to ensure identification is not only based on functional form assumptions.We find that innovative companies can better cope with loan denials. Compared with noninnovators, innovators can realize additional 10.0 percentage points of the share of actual to planned investment when facing a loan denial. By investigating the mix of financing sources that companies ultimately use to finance their actual investment, we provide an explanation for the better performance. Innovative companies...

Mezzanine Capital Analysis and Financing Results for Companies

“…Enterprises using external sources of financing may have a greater ability to use the acquired capital more efficiently and thus may achieve better results from the invested funds. It may also be related to the innovative approach of the enterprise in a given field (Mueller and Reize, 2013).…”