Entrepreneurs and funding decisions: evidence from Australian SMEs

This paper investigates the decision by Small and Medium Enterprises (SMEs) to raise funding via the sale of equity. Prior theoretical and empirical work on the ‘pecking order’ of funding has indicated that we should not expect SMEs to prefer equity funding over internal funding and external debt, except under particular circumstances relating to the risk aversion and autonomy aversion of the owner-manager. We utilise data from the Business Longitudinal Survey undertaken by the Australian Bureau of Statistics to investigate relationships suggested by the literature. We found that only about 5% of SMEs intended to raise funds from the sale of equity. Of these, the decision to seek equity funding was significantly and positively related to the owner-manager’s intention to sell the firm; to the firm’s intention to increase the number of markets targeted; and to the firm’s growth intentions. The decision was also negatively related to the firm being a family business.