Capital allocation efficiency of SMEs: Global evidence

Liang Ma and Xiaowen Zhang

International Review of Financial Analysis, 2025, vol. 107, issue C

Abstract: Leveraging a comprehensive cross-country dataset, this study systematically examines whether and how small and midsize enterprises (SMEs) differ from large firms regarding capital allocation efficiency, which is an essential matter of economic efficiency. We find that SMEs exhibit significantly lower investment responsiveness to growth opportunities compared to large firms. This divergence is not driven by the differences in growth opportunities, cash flows or external dependence between small and large public firms. While we did not find evidence suggesting larger financial market size enhances SMEs’ capital allocation efficiency, we documented that a more informative financial market substantially improves SMEs’ investment sensitivity to growth opportunities. These findings provide important global policy insights specifically relevant for enhancing SMEs’ efficiency and growth.

Keywords: Capital allocation; Firm size; Investment; Financial development (search for similar items in EconPapers)
JEL-codes: E44 G15 G31 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:107:y:2025:i:c:s1057521925006830

DOI: 10.1016/j.irfa.2025.104596

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