Small- and medium-sized enterprises and the financial crisis

May 5, 2021

This article studies the growth determinants of small and medium-sized firms (SMEs) before and after the 2008 subprime crisis. SME’s growth correlates positively with firm-level cash flow and GDP, whereas it correlates negatively with firm-level debt, firm size and age, as well as with the economy-wide risk-free interest rate. After 2008, the financial crisis with the associated implementation of austerity measures in the Portuguese context, produced a negative effect on SME growth.

In the post financial crisis period, and compared to the pre-crisis period, firm-level cash flow decreased in relevance as a growth determinant, while debt gained an even stronger negative effect on SME growth.

The financial crisis and the debt burden it generated severely limited SME growth in Portugal, possibly leading to the inefficient loss of investment opportunities. The fact that most SME debt is bank debt exposed these firms indirectly to the financial crisis via the exposure that banks had to the crisis besides exposing them directly via the decline in economic activity that resulted from the crisis.

The paper discusses several policy recommendations. One such policy is the need to diversify the funding sources for SMEs from just bank debt, either by developing the private equity market, and access to other sources of debt financing.

Click here to go to the paper by Zélia Serrasqueiro, João Leitão, and David Smallbone.