The present study analysed the strategic financing choices of small businesses through the lens of
the business life cycle, verifying the existence of a growth pattern and whether this pattern is
homogeneous over time and for different industries and institutional contexts. The growth of small and
medium-sized firms, i.e., those most vulnerable to information and incentive problems, is often
constrained by the lack of access to external finances. Understanding the financial features of small and
medium-sized firms at different stages of the business life cycle allows managers and policy-making
institutions to correctly support firm growth. Our empirical analysis revealed several interesting
findings. As hypothesized by Berger and Udell (1998), we found that the degree of informational
opacity is a key determinant of a firm’s financing behavior, even more considering the various stages
of its life cycle.
Different sensitivities to information asymmetries modify the hierarchy of financial
decision-making according to the changing economic conditions that characterize firms at different phases of their business life cycle. In general, higher profitability allows managers to be less dependent
on creditors for financial resources. In the present study, this was particularly true for mature and
growing firms, while young firms were more dependent on external finance (debt) to growth18. Despite
the high cost of debt for start-up and growing Italian firms, the support conferred by debt is essential to
the early stages of a firm’s life. Internal resources are not enough to finance growth and the lack of a
private equity market increases the role of banks in providing financial support. Therefore, start-up and
young firms need an increasing amount of debt to sustain their growth, while they rebalance gradually
their capital structure after a consolidation of the business. Thus, the pecking order theory seems to do
not apply for young firms, where debt seems to be at the first place; by contrast, this theory has a high
magnitude for firms that have consolidated their business.
This financial growth pattern for small and medium-sized firms seems to be homogeneous along
different industries and institutional contexts. It has the same magnitude for firms operating in hightech industry and in utility industry as well as comparing firms located in the South of Italy, where the
financial system is more inefficient and the investor protection poorer, with firms located in other
macro-areas of Italy.
The existence of a financial growth pattern is showed to be particularly relevant and sticky over
time; this pattern seems to dominate across different industry affiliation and institutional contexts.
Nevertheless small and medium-sized firms showed different average leverage across industries and
institutional contexts,
the financial growth pattern resulted is similar. From a political point of view,
this result showed that: 1) young firms have a relevant need to external resources to growth,
independently of the industry affiliation and of the place where this young firm is located; start-ups and
growing firms need external finance to support their investments; 2) in Italy, a typical bank-based
country, due to the lack of venture capital and private equity market, it is crucial the role of debt to
sustain the growth of small and medium-sized firms; 3) due to the fact that debt it is not a suitable
source of finance for start-ups and growing firms, policy makers should foster a development of the
financial system that should be able to sustain with “patient” capital in the form of equity finance small
and medium-sized firms.
While the existence of a financial growth pattern is relevant and robust over time and across
industries and institutional contexts, there are systematical differences across the firm’s life cycle in the
capital structure determinants.
If the financial growth pattern is similar across industries and institutional contexts, it is not the average debt level as well as it is different the role of the various
capital structure determinants. Controversy in the empirical literature on the determinants of financial
decision-making can be based on a failure to take into account the different degrees of information
opacity, and, consequently, firms’ characteristics and needs at specific stages of their life cycles.
In summary, contrary to conventional wisdom, debt is fundamental to the growth of Italian firms
in the early stage of their business life cycle, while mature firms rebalance their capital structure by
substituting debt for internal capital. Indeed, Giannetti (2003) found that this is especially true in
countries where the financial market is not well derdeveloped and not highly efficient. This issue is
highly consequential for research on capital structure and deserves more detailed investigations that, at
the same time, consider the stages that make up the business life cycle. If firms can raise more of their
capital with equity, they will be better able to make longer-term investments. This suggests directions
for future research that focus on the relationship between investment horizons and institutional factors.
