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Essays on Financial Technology and SME Finance: A Tale of Two Effects of the Global Financial Crisis: Financing SMEs and Innovative Financing
KTH, School of Industrial Engineering and Management (ITM), Industrial Economics and Management (Dept.). KTH. (Economics)ORCID iD: 0000-0003-3679-1222
2019 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

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.

Abstract [sv]

Finanskrisen 2008–2009 ägde rum exakt ett halvt sekel efter publiceringen av Modigliani och Millers (M&M) teorem, ofta kallat principen för kapitalstrukturens irrelevans. Detta sammanträffande är ironiskt, eftersom krisen har framhävt vikten av avvikelser från centrala antaganden i detta teorem. På ett decenniums avstånd från krisen undersöker denna avhandling konsekvenserna av denna unika händelse. Detta görs genom att undersöka drivkrafter bakom finansiärernas och företagens finansieringsbeslut och effekter av dessa beslut – effekter som enligt principen för kapitalstrukturens irrelevans inte borde ha existerat.

Finanskrisen har utökat vår kunskap om betydelsen av företagsfinansiering, men också förändrat aktörernas beteende. En mängd finansiella innovationer har uppstått i dess kölvatten, möjliggjorda av digital teknik, som omformar eller tar bort de traditionella mellanhänderna. Genom att spåra genombrottet av dessa teknologier till krisen tecknar denna avhandling en bild av krisen som inte bara en källa till förstörelse, utan också som en källa till kreativ förstörelse. I synnerhet syftar denna avhandling till att empiriskt undersöka två övergripande forskningsfrågor:

(1) Vilka är de avgörande faktorerna och verkliga effekterna av finansieringsbeslut och resultat för små och medelstora företag vad gäller de olika finansieringskällor ett företag kan använda sig av? (Artiklarna IV och III)

(2) Vilka är de viktigaste drivkrafterna för införandet av ny finansiell teknik? (Artiklarna I och II)

I artikel I undersöks empiriskt huruvida misstro till finansiella institutioner, som förvärrades av finanskrisen, har varit en faktor i tillväxten av peer-to-peer-utlåning. Studien hävdar att misstro till finansiella mellanhänder (dvs. banker) kommer att förskjuta en individs tillgångsfördelning mot alternativa tillgångar (t.ex. crowdfunding). Genom att utnyttja geografisk variation i sådan misstro och i utlåning på en av de största P2P-utlåningsmarknaderna, Prospser.com, finner denna studie att ökad misstro gentemot banker är positivt förknippat med sannolikheten och nivån på deltagande i lån. Vidare är misstro mot banker negativt korrelerad med volymen på insättningar i traditionella banker.

Artikel II undersöker empiriskt vilka faktorer som är associerade med spridning av sådan infrastruktur som är nödvändig för framväxten av Bitcoin som ett system för finansiella transaktioner (Bitcoin-noder) och infrastruktur som möjliggör användning av bitcoins för vardagliga ekonomiska transaktioner (Bitcoin-butiker). Legala strukturer, samt ekonomiska och sociala faktorer, inklusive brottslighet, undersöks. Resultaten ger ett visst stöd till uppfattningen att framväxten av kryptovalutans infrastruktur är kopplad till upplevda misslyckanden hos traditionella finansiella system, genom att spridningen av Bitcoin-infrastruktur är förknippad med låg förtroende för banker och det finansiella systemet bland invånare i en region, och med förekomst av inflationskriser. Engagemanget för Bitcoin är också högre på platser med välutvecklade banktjänster. Slutligen ger undersökningen stöd åt uppfattningen att intresset för Bitcoin- delvis drivs av de fördelar kryptovalutor har som medium vid olaglig handel.

I artikel III undersöks effekterna av att inte kunna säkerställa önskad finansiering, vad gäller små och medelstora företags investeringar och resultat. Företag som upplevt sådana svårigheter under finanskrisen matchas med liknande företag som varit framgångsrika i sitt sökande efter externt kapital, vilket gör det möjligt att implementera en kontrollgruppsanalys. Resultaten pekar på att företagens investeringar hämmats på grund av bristande tillgång av kapital under finanskrisen. God likviditet hjälper till att absorbera denna försörjningschock på kort sikt, men svårigheter att erhålla kapital leder ändå till en lägre investeringsgrad och till sämre resultat för företagen. Studien visar att små och medelstora företag inte fullt ut förmådde parera sämre tillgång till kredit under krisåren genom att tillgå andra former av finansiering.

I artikel IV utnyttjas två nya datasätt vilka gör det möjligt att observera små och medelstora företags ansökningar och användning av olika skuld- och kapitalinstrument för att studera avgörande faktorer för finansieringsval och resultat för europeiska små och medelstora företag. Företagen befinns i stor utsträckning bete sig i linje med den etablerade ”pecking order”-teorin, med vissa intressanta avvikelser. Innovativa företag är mer benägna än icke-innovativa företag att ansöka om lån, men innovativitet är bara förknippat med framgång i detta inom gruppen av äldre företag, och bland företag vars innovationsansträngningar är marknadsinriktade och mindre teknikintensiva. Unga företag med höga investeringsbehov hade svårigheter att få ny lånefinansiering under krisen, men sådana företag var fortfarande mer benägna än det genomsnittliga företaget att dra till sig investeringar från externa placerare.

Place, publisher, year, edition, pages
Stockholm, Sweden: KTH Royal Institute of Technology, 2019. , p. 332
Series
TRITA-ITM-AVL ; 2019:36
Keywords [en]
Corporate Finance; Entrepreneurial Finance; Global Financial Crisis; Financial Innovation; Small and Medium Enterprises
National Category
Economics Business Administration
Research subject
Economics; Industrial Economics and Management
Identifiers
URN: urn:nbn:se:kth:diva-263146ISBN: 978-91-7873-368-2 (print)OAI: oai:DiVA.org:kth-263146DiVA, id: diva2:1366813
Public defence
2019-11-22, Room D2, Lindstedtsvägen 5, KTH, Stockholm, 17:36 (English)
Opponent
Supervisors
Projects
EDIM - European Doctorate in Industrial ManagementAvailable from: 2019-10-31 Created: 2019-10-30 Last updated: 2019-10-31Bibliographically approved
List of papers
1. Distrust in Banks and Fintech Participation: The Case of Peer-to-Peer Lending
Open this publication in new window or tab >>Distrust in Banks and Fintech Participation: The Case of Peer-to-Peer Lending
(English)Manuscript (preprint) (Other academic)
Abstract [en]

The volume of crowdfunding transactions has surged during the last decade. This paper empirically examines the effect of distrust in banks on crowdfunder participation in P2P lending. We argue that distrust in the intermediary (i.e. banks) will shift an individual’s asset allocation towards alternative assets (e.g. crowdfunding). We exploit geographical variation in such distrust on lending on one of the largest P2P lending markets, Prospser.com. We find that higher distrust in banks is positively associated with the likelihood and level of crowdfunder participation in loans, and is negatively correlated with volumes of commercial banks’ deposits and reliance on deposit financing.

Keywords
Crowdfunding; Peer-to-Peer Lending; Distrust in Banks and Financial Institutions; FinTech.
National Category
Economics Business Administration
Research subject
Industrial Economics and Management; Economics
Identifiers
urn:nbn:se:kth:diva-263141 (URN)10.2139/ssrn.3124301 (DOI)
Projects
EMJD Program, European Doctorate in Industrial Management (EDIM), funded by European Commission, Erasmus Mundus Action 1
Note

QC 20191104

Available from: 2019-10-30 Created: 2019-10-30 Last updated: 2019-11-04Bibliographically approved
2. Global Drivers of Cryptocurrency Infrastructure Adoption
Open this publication in new window or tab >>Global Drivers of Cryptocurrency Infrastructure Adoption
(English)Manuscript (preprint) (Other academic)
Abstract [en]

A vast digital eco-system of entrepreneurship and exchange has sprung up with Bitcoin’s digital infrastructure at its core. We explore the worldwide 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, we investigate the role of legal, criminal, financial and social determinants of the adoption of Bitcoin infrastructure. We 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 country-level inflation crises. On the other hand, our findings also suggest that active support for Bitcoins is higher in locations with well-developed banking services. Finally, we find support for the view that bitcoin adoption is also partly driven by cryptocurrencies’ usefulness in engaging in illicit trade.

Keywords
Bitcoin network; Digital Currencies; Cryptocurrencies; Financial Technology (FinTech); Bitcoin nodes, Bitcoin merchants
National Category
Economics Business Administration
Research subject
Economics
Identifiers
urn:nbn:se:kth:diva-263143 (URN)10.2139/ssrn.3309830 (DOI)
Projects
EDIM - European Doctorate in Industrial Management
Note

QC 20191104

Available from: 2019-10-30 Created: 2019-10-30 Last updated: 2019-11-04Bibliographically approved
3. Turned Down in a Downturn? Real Effects of Not Securing Capital in the Global Financial Crisis
Open this publication in new window or tab >>Turned Down in a Downturn? Real Effects of Not Securing Capital in the Global Financial Crisis
(English)Manuscript (preprint) (Other academic)
Abstract [en]

I investigate effects of funding rejections on firm investments and performance, through matching successful and observably-similar unsuccessful capital-seeking SMEs. This approach to disentangling supply-side from demand-side forces by exploiting realized application outcomes is novel and robust to substitution effects between sources of capital. I find 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.

Keywords
Capital Impairments; Global Financial Crisis; Real Effects; Financing Rejection
National Category
Economics Business Administration
Research subject
Economics
Identifiers
urn:nbn:se:kth:diva-263144 (URN)
Projects
EDIM - European Doctorate in Industrial Management
Note

QC 20191031

Available from: 2019-10-30 Created: 2019-10-30 Last updated: 2019-10-31Bibliographically approved
4. Financing Decisions and Outcomes of European SMEs in the Global Financial Crisis
Open this publication in new window or tab >>Financing Decisions and Outcomes of European SMEs in the Global Financial Crisis
(English)Manuscript (preprint) (Other academic)
Abstract [en]

This study examines the financing of European SMEs during the 2007-2009 global financial crisis. We investigate firm-specific determinants of firms’ external financing applications and outcomes, distinguishing between various types of debt and equity instruments. Accounting for firms’ non-random willingness to seek additional outside capital, we mitigate sample selection biases and find that 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 had difficulties obtaining debt financing, but were more likely than average to succeed if applying for equity. Contrasting findings with a similar examination of the post-crisis period suggests that the crisis particularly disadvantaged such young, innovative firms with high investment needs to secure debt.

Keywords
SME Finance; Financing Decisions; Global Financial Crisis; European SMEs; Innovation
National Category
Economics Business Administration
Research subject
Economics
Identifiers
urn:nbn:se:kth:diva-263145 (URN)
Projects
EDIM - European Doctorate in Industrial Management
Note

QC 20191031

Available from: 2019-10-30 Created: 2019-10-30 Last updated: 2019-10-31Bibliographically approved

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