Evaluating Flexibility in Small Firm Financing

Andrey Pavlov, Panikkos Poutziouris and Khaled Soufani
Additional contact information
Andrey Pavlov: Simon Fraser University
Panikkos Poutziouris: University of Manchester Institute of Science and Technology, Manchester University Consortium
Khaled Soufani: Concordia University

Journal of Entrepreneurial Finance, 2004, vol. 9, issue 1, 73-97

Abstract: The choice of financing source is particularly difficult for a small firm due to the high uncertainty about future liquidity requirements. We show that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such firms but also to determine the optimal financing policies. In particular, we investigate the choice between liquid, but more expensive, forms of financing and restrictive, but cheaper, sources of capital. In addition to developing an optimal financing policy for a typical firm, we estimate the value of flexibility in a financing arrangement. This, in turn, provides a rational explanation for the otherwise surprisingly high levels of flexible financing used by small firms. Beyond small firm management, our findings have important implications for financial institutions and regulators.

Keywords: Small Firm Financing; Small Business; Flexibility (search for similar items in EconPapers)
JEL-codes: G21 G32 M13 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (1)

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