How are small firms financed? Evidence from small business investment companies

Funding of investment projects by firms is studied by examining the implications of the contracting theory on how small business investment companies (SBICs) are financed. Results show that business projects which generate tangible assets and allow little management discretion are more likely to be debt-funded than equity-funded. Results also suggest that firms that are valued based on their growth opportunities or industry-specific information are less likely to be granted debt financing due to fear for the costs of financial distress.