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On the optimal investment finance of small businesses

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  • Mario Tirelli

    (University of Roma Tre)

Abstract

Small businesses are frequently characterized by “information opacity” which results from several information asymmetries combined. Certain firm and institutional characteristics (e.g., their young age, small capitalization, and simplified accountancy requirements) make it hard for outside investors to verify their financial situation (net worth) and investment decisions at different stages of their realization. This work derives the (second-best) efficient investment and financial policies of small businesses when their opacity results in a possible adverse selection on entrepreneurs’ initial net worth and in a double-moral hazard, on the firm investments and on the release of information on their realized earnings. Finally, these (second-best) efficient policies are compared with those documented in much of the empirical evidence on small companies.

Suggested Citation

  • Mario Tirelli, 2021. "On the optimal investment finance of small businesses," Small Business Economics, Springer, vol. 56(4), pages 1639-1665, April.
    • Handle: RePEc:kap:sbusec:v:56:y:2021:i:4:d:10.1007_s11187-019-00283-1
    DOI: 10.1007/s11187-019-00283-1
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    More about this item

    Keywords

    Asymmetric information; Moral hazard; Adverse selection; Firm investment; Firm financial policy; Small business;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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