An Instrument Variable Model of the Impact of Financing on Performance of Small Businesses in Australia Pre-Global Financial Crisis — Firm Level Empirical Analysis Using ABS Business Longitudinal Data 2007

Firm level empirical research on the impact of financing decisions on small business performance is scarce in the Australian context. This study adopts an instrument variable (IV) approach to analysis the impact of financing decisions, in particular, equity or debt obtained, on the performance of small businesses using the panel data from ABS Business Longitudinal Database (BLD) 2004-05, 2005-06 and 2006-07. Performance variables, i.e. sales and expenditure, are used as dependent variables. Equity and debt obtained are used as independent variables (or known as treatments). Instrument variables include size of the business, age of the business, number of locations, industry division etc. The results from IV modelling outperformed that obtained from OLS.Findings include: (1) financing have significantly positive impacts on the performance of small businesses in Australia; (2) equity and debt financing are used as alternatives; comparatively, equity financing is preferred; (3) capital purchase are largely funded by the debt financing, while noncapital purchases and salary expense are funded by the equity financing; (4) equity financing is more often used for firms with increasing capital purchases and declining noncapital purchases, while debt financing is used by firms with the opposite trends. The paper concludes with a discussion of the limitations of this research and future research directions