Cost of capital in SMEs : Theoretical considerations and practical implications of a case study

Purpose – The purpose of this paper is to discuss the applicability of value based management (VBM) concepts for small to medium‐sized enterprises (SMEs) and to identify obstacles for its implementation. Estimating cost of capital is central to all VBM concepts, it is hence intended to critically analyse approaches that allow estimating cost of capital for non‐publicly traded firms. Design/methodology/approach – The paper is based on literature review and a case study approach. A case study on estimating the cost of capital has been conducted with a single manufacturing firm in Germany. Findings – VBM may provide useful management concepts for SMEs. Estimating the cost of capital has been found to be a critical element of implementing VBM concepts. Due to the absence of capital market data, cost of equity in SMEs has to be derived by means of alternative procedures. Results of a case study implicate that a combination of different methods may provide reasonable results in practice. Research limitations/implications – The applied research approach and the heterogeneity of the SME sector do not allow generalizing the results of this research. Originality/value – The paper addresses a major barrier for implementing VBM in SMEs. It proposes a combination of analogy and qualitative approaches for estimating the cost of equity in SMEs.