Essays on Financial Technology and SME Finance : A Tale of Two Effects of the Global Financial Crisis: Financing SMEs and Innovative Financing
Abstract: The financial crisis of 2008-2009 took place exactly half a century after the publication of the seminal Modigliani and Miller (M&M) theorem, often called the capital structure irrelevance principle. This timing is curious since the crisis has highlighted the significance of deviations from assumptions of this theorem, i.e. the importance of corporate finance. A decade on, this thesis explores consequences of this unprecedented event by examining the determinants and effects of financiers’ and firms’ financing decisions, whose irrelevance is implied by the capital structure irrelevance principle.The financial crisis has not only expanded our knowledge frontier on corporate financing, it has altered financing itself. A host of financial innovations have arisen in its wake, enabled by digital technologies, which reshape or remove the role of traditional intermediaries. By tracing the adoption of these technologies to the crisis, this thesis frames the crisis not merely as a source of value destruction, but also as a source of creative destruction. Specifically, this thesis aims to empirically investigate two overarching research questions:(1) What are the determinants and real effects of financing decisions and outcomes for Small and Medium Enterprises (SMEs), in the face of crisis-era contractions in bank lending? (Papers IV and III)(2) What are the main drivers of the adoption of new financial technologies? (Papers I and II)Paper I empirically examines whether distrust in financial institutions, exacerbated by the financial crisis, has been a factor in the growth of peer-to-peer lending. The study argues that distrust in the intermediary (i.e. banks) will shift an individual’s asset allocation towards alternative assets (e.g. crowdfunding). By exploiting geographical variation in such distrust on lending on one of the largest P2P lending markets, Prospser.com, this research finds that higher distrust in banks is positively associated with the likelihood and level of participation in loans, and is negatively correlated with volumes of commercial banks’ deposits and reliance on deposit financing.Paper II empirically investigates drivers of the spread of infrastructure necessary to maintain and grow Bitcoin as a system (Bitcoin nodes) and infrastructure enabling the use of bitcoins for everyday economic transactions (Bitcoin merchants). Specifically, it investigates the role of legal, criminal, financial and social determinants. Findings offer some support for the view that the adoption of cryptocurrency infrastructure is driven by perceived failings of traditional financial systems, in that the spread of Bitcoin infrastructure is associated with low trust in banks and the financial system among inhabitants of a region, and with the occurrence of inflation crises. Active support for Bitcoins is higher in locations with well-developed banking services. Finally, it lends support to the view that bitcoin adoption is partly driven by cryptocurrencies’ usefulness in engaging in illicit trade.Paper III investigates effects of funding rejections on firm investments and performance, through matching successful and observably-similar unsuccessful capital-seeking SMEs. This approach to disentangling supply- from demand-side forces by exploiting application outcomes is novel and robust to substitution effects between sources of capital. The study finds evidence of firms’ investments being hampered due to inability to access capital in the crisis. Whereas liquidity helps absorb this supply shock, rejection makes firms less prone to use liquidity for investments in the post-crisis period. Reduced investment plans following rejection are a primary channel through which firm performance is lowered. Results imply that capital substitutions were not adequate to shield SMEs from crisis-era distress to creditor balance sheets.Paper IV exploits two novel datasets, unique in enabling observation of SME applications for, and use of, various debt and equity instruments, to study determinants of financing choices and outcomes of European SMEs. It tests applicability of extant research to business cycle contractions and bank-based financial systems, and finds similar results. During the crisis, SMEs largely behave in accordance with the pecking-order theory. Innovative firms seek debt more, but innovativeness is only associated with successful search if SMEs are old or market-oriented, and not tech-intensive. Young firms with high investment needs in the crisis had difficulties obtaining debt, but were more likely than average to succeed if applying for equity.
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