SMEs bank dependence : the relationship between profitability and investments for Dutch SMEs

(1)

SMEs bank dependence: the relationship between profitability

and investments for Dutch SMEs

Thesis Supervisor: Arnoud Boot

Katherinne Ortiz Espinoza MSc Business Economics

(2)

Statement of Originality

This document is written by Student Katherinne Ortiz Espinoza who declares to take

full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no

sources other than those mentioned in the text and its references have been used in

creating it.

The Faculty of Economics and Business is responsible solely for the supervision of

completion of the work, not for the contents.

(3)

Abstract

Several Dutch policy studies have identifiedthe frictions proposed in the academic and economic

literature in the Dutch financing market of SMEs. These frictions were already seen in the pre-crisis period, but have become more pronounced in recent years. Fazzari et al. (1988), state that for firms that are more constrained in the financing market, by for example market frictions, a stronger relation can be found between investments and internal funds. This may particularly be true for SMEs, as they mainly depend on bank funding because of the high information asymmetry. However, according to Rajan (1992) as firms grow they become less dependent on bank funding. This study has made an effort to find evidence for a combination of these theories, by answering the question: To what extent do firms with higher bank dependence show a stronger

relation between profitability and fixed investments? The following two hypotheses were tested

against a 172.339 (2006) and 234.753 (2013) items sample of Dutch SMEs from the AMADEUS database. The first hypothesis stated that profit and the change in fixed investments are positively related for Dutch SMEs. The second hypothesis stated that the relation between the growth of fixed assets and profit is strongest for micro enterprises and weakest for larger enterprises. First a comparative analysis of the pre-crisis and post-crisis period is presented, followed by Ordinary Least Square (OLS) regression and robust regression. In this study no statistical evidence is found for the proposed hypotheses, as the strongest relation was found for medium sized enterprises and the weakest relation for micro enterprises.

(4)

1 Introduction

In the economic literature four potential frictions in the SME financing market can be distinguished. Firstly, information asymmetry influences the supply and demand of funding. Secondly, a supply friction is caused by difficulties in the access to bank funding. Also, the lack of financing options in the financial market could cause a supply friction. Fourthly, underdeveloped legal and tax regulations cause a demand friction. Market frictions play a critical role in the financing possibilities for SMEs. According to Fazzari (1988) firms that are more constrained in the financing market by for example market frictions, depend more on internal funds to finance their investments.

In general, European Small and Medium-sized Enterprises primarily depend on bank lending (Popescu, 2008). The reason for this is that the risks associated with SME lending are high for potential investors. First, information asymmetry is high because they are not legally required to display their financial records as they are usually privately held. Therefrom, it is assumed that the smallest firms are hindered the most by information asymmetry. As such, the degree of bank dependence is higher for smaller firms (Rajan, 1992). Secondly the survival rate of SMEs is relatively low. The majority of SMEs exit the market before they reach the fifth year in business (Popescu, 2008). As a consequence, SMEs have less financing options compared to larger firms (OECD, 2009).

According to Beck (2006), SMEs are important for the economy. Firstly, they stimulate innovation. Secondly, they increase competition between existing firms which increases productivity and stimulates economic growth. Lastly, they account for a large proportion of employment and contribute to job creation. In the European Union 99.8% of the firms are SMEs and together they account for 66.7% of employment (OECD, 2015)

In the academic literature the influence of frictions on the financing market for SMEs is researched. Firstly, Beck (2008) confirmed the presence of information asymmetry and its influences on the financial market. Secondly, according to Harhoff et al. (1998) large firms with easier access to external funding, grow faster compared to smaller firms which have more difficult access to external funding. Further, Klein (2014) noted that a lack of alternative financing sources puts pressure on the investment plans and overall activity of SMEs. Lastly,

(8)

according to Dimerguc et al. (1999) the legal regulations in a country influence the access to funding. As such underdeveloped legal regulations may cause a friction on the financing market. In the recent years the European SME sector has also faced several other problems. On the one hand, the financial crisis caused a decline in overall demand. On the other hand, in response to the financial crisis bank regulation was strengthened. The tightening of bank regulation has made the availability of bank funding more difficult. According to Klein (2014), the worsening financial conditions are likely to have a large effect on firms that rely on external funding for the financing of their day-to-day operations and investment plans.

This study will focus on a sample of Dutch enterprises, as the access to loan financing of Dutch SMEs has been more difficult compared to other countries in the European Union. In 2013 39% of the loan applications of SMEs have been rejected, compared to a 14% average rejection rate in the European Union (European Commission, 2014). It will contribute to the existing academic literature by combining the theories proposed by Fazzari et al. (1988) and Rajan (1992). The following can be implied if the two theories are combined: frictions in the SME financing market lead to financing constraints for SME entrepreneurs, which make them more dependent of internal funds because of their high bank dependence. As such, a stronger relation between the profitability and the change in investment is expected for smaller firms than for larger firms. Therefrom the research question becomes:

To what extent do firms with higher bank dependence show a stronger relation between profitability and fixed investments?

In order to answer the research question, in chapter 2 an overview of the financing market for SMEs will be presented first. In chapter 3 the data and descriptive statistics of the balance sheet variables of a sample of Dutch enterprises will be presented. In chapter 4 the research methodology will be outlined, followed by a discussion of the results in chapter 5. Lastly, in chapter 6 conclusions and implications for further research will be presented.

(9)

2 An overview of the financing market for SMEs

In this chapter the definition and importance of SMEs will be clarified first. Secondly, the theoretical models and academic literature describing the capital structure and possible market frictions on SMEs will be discussed. As an addition, the key findings and recommendations of Dutch policy studies will be presented. Further, the influence of the financial crisis on the SME financing market will be considered. Lastly, the reason for this study is made clear.

2.1 Small and Medium sized Enterprises

2.1.1 Definition

There are many differences in the statistical definition of Small and Medium-sized Enterprises (SMEs). The most common definition of an SME is the one proposed by the European Commission. According to the European Commission (2003) firms are small and medium-sized enterprises if they satisfy either one of the three following conditions. The first condition is the number of employees. If firms have less than 250 employees they can be classified as an SME. Secondly, if the turnover of a firm is below 50 million euros a firm can also be called an SME. Lastly, a balance sheet total below 43 million euros also classifies a firm as an SME. Furthermore, within the SMEs three different categories can be identified. Firstly, the micro category contains firms that have less than 10 employees. Secondly, small enterprises have between the 10 and 49 employees. And lastly, the medium-sized firms employ between 50 and 250 people. This definition and categorization of SMEs is often used, for example by the Dutch expert group on SME finance (Commissie de Swaan, 2011) and by the study on finance in the Netherlands of the consultancy firm PricewaterhouseCoopers (2011).

De Nederlandse Bank (DNB) uses a much broader definition: “SMEs are defined as all private enterprises, institutions or funds that deal with non-financial services or the production of goods and whose annual turnover is less than 50 million euros” (DNB, 2014).

(10)

Table 1 Summary of different SME definitions

The Dutch Social and Economic Council (SER, 2014) includes a fourth category: the independent contractor. An independent contractor is someone who is self-employed. According to the definition used by the European Commission (2003) an independent contractor would belong to the micro enterprise category. However, in the Netherlands the majority of the enterprises are independent contractors and micro enterprises. Therefore, this study includes the fourth category. Apart from the number of employees, the SER does not define conditions for the annual turnover or balance sheet total of an independent contractor (SER, 2014). Just like the Dutch Social and Economic Council, McKinsey & Company (2014) treats independent contractors as well as a sub category. On the other hand, the micro category is not incorporated in its categorization. According to McKinsey & Company (2014) small enterprises are firms that employ between 2 and 50 persons. Furthermore, it claims that a firm is a small enterprise if it satisfies two conditions: the annual turnover is less than 7 million euros and the balance sheet is below 5 million euros. These two conditions are less stringent compared to the ones set by the European Commission (2003).

Table 1 provides an overview of the different statistical definitions of SMEs, as discussed

above.

2.1.2 The share of SMEs in the economy

In the European Union 99.8% of the firms are classified as SME. Together these SMEs provide employment to 67.4% of the labour force (OECD, 2015). Furthermore, on average SMEs produce 50% of the Gross Domestic Product (Ayyagari et al., 2007).

Defintion used by Firm size number (full time employees) Turnover or Balance sheet total

European Commission (2003) Micro ≤ € 2 million ≤ € 2 million Commissie de Swaan (2011) Small ≤ € 10 million ≤ € 10 million PwC (2011) Medium ≤ € 50 million ≤ € 43 million SMEs ≤ € 50 million ≤ € 43 million

DNB (2014) SMEs < € 50 million

SER (2014) Independent contractor Micro

Small Medium SMEs

McKinsey & Company (2014) Independent contractor < € 7 million < € 5 million Small < € 7 million < € 5 million

(0-9) 1 (2-50) (10-49) (50-250) (0-250) (10 - 49) (50 - 250) (0-250) 1 (2-9)

(11)

A recent report of the Organization for Economic Co-operation and Development (OECD, 2015) on SME financing indeed showed similar figures for the Dutch economy. Also 99.8% of the enterprises in the national economy of the Netherlands are SMEs. The majority of these firms are independent contractors and micro firms. In total SMEs employ 65% of the Dutch labour force. Between 2007 and 2010, 50% of the job creations are attributable to small enterprises (10 - 49 employees) and 29% to medium enterprises (50 – 249 employees). However, small enterprises are also responsible for 50% of the job losses in the same period (SER, 2014).

2.1.3 The characteristics of SMEs

According to Popescu (2008) SMEs have some specific characteristics compared to large firms. Firstly, information asymmetry is high for SMEs since they are not legally required to display their financial records as they are usually privately held. Secondly, The survival rate of SMEs is relatively low. The majority of SMEs exit the market before they reach the fifth year in business. Furthermore, SMEs are less solvable compared to large firms because they usually have fewer assets, which also increases the risk for potential investors. However, banks can provide relative cheap funding compared to potential investors in the public debt market. As a consequence, European SMEs depend primarily on bank lending (Popescu, 2008). According to Rajan (1992) the smallest firms are hindered the most by information asymmetry and therefore depend the most on bank funding.

Also often the owners of SMEs don’t have sufficient skills and knowledge of the business and its sector. Besides, usually SMEs are restricted to a limited geography, which creates a dependence on local (domestic) demand. In addition, SMEs are more sensitive to changes in the financial conditions because of three other reasons (OECD, 2009). First, small firms are not able to downsize their business since they are already small. Secondly, SMEs often operate in one specific sector which makes it more difficult to diversify their activities. Lastly, usually they have less financing options compared to larger firms. In table 2 the characteristics for SMEs are compared to those of large enterprises.

(12)

Table 2 Summary of characteristics of SMEs and large enterprises

2.1.4 The importance of SMEs

According to Beck (2006) SMEs are important for the economy and they contribute in different ways to the economic development of the European Union. First, SMEs are seen as the driving force of innovation. SMEs increase competition between firms. As such firms are forced to increase their productivity by working more efficiently or by technological innovations. Solow (1995) stated that economic growth is only partly explained by an increase in inputs of labour and capital. Instead, economic growth is mainly explained by technological progress. As such, SMEs stimulate economic growth. Furthermore, they account for a large proportion of employment and contribute to job creation (OECD, 2015).

2.2 Market frictions for SMEs

As discussed in the previous sections, SMEs have certain characteristics that differentiate them from large enterprises. As such, in the economic literature several potential frictions in the SME financing market are proposed. In this section the various theories that apply to SMEs will be discussed.

Firstly, Berger and Udell (1998) state that the financial structure of SMEs is mainly driven by the access to the capital market. When the access to bank lending becomes more difficult, the firm’s growth is hindered. In their research empirical evidence is found that in both developed and developing countries the growth of small firms is constrained by the access to external funding.

Characteristics Small and Medium sized Enterprises (SMEs) Large Enterprises

Ownership Usually privately held Privately and publicly held Location Limited geography (national economy) More international orientated Sectors Usually in one specific sector More diversified

Survival rate Low High

Information assymmetry High Low

Solvability Low High

(13)

Secondly, according to Myers and Majluf (1984) there is a preference in financing options. The pecking order theory proposes that firms prefer to first finance their operations with internal funds and only then with external funds. Within external funds there is also an order of preference, first debt and thereafter equity, but only when needed (Myers & Majluf, 1984). First, firms prefer internal funds because there are no transaction costs, whereas for external funds this is the case. Secondly, equity is underpriced because of information asymmetry. Information asymmetry arises because managers and owners of a firm have private information about the future prospects, while investors lack this information. An announcement of new stock issuance may be seen as bad news by investors, since managers will only issue equity when they think the firm is over-valued. This causes a decline in the stock price (Briozzo & Vigier, 2007).

SMEs are usually unlisted, which increases information asymmetry even more. Information asymmetry poses two problems in debt financing. The first problem is adverse selection. There is a lack of information on the abilities of the individuals and profitability of the investment. It is difficult for lenders to distinguish between high and low risk entrepreneurs. Secondly, moral hazard arises because there is a risk that the individual will not act in the best interest of the bank (Binks, 1992). SMEs face high information costs and higher risk premium since they are less transparent. It raises the costs of external funding and makes the access to bank lending for SMEs more difficult (Beck 2006).

The previously discussed pecking order theory is in line with the financing problems faced by SMEs, because information asymmetry gives rise to the hierarchy of financing sources. If the pecking order theory would be applied to SMEs, the hierarchy of financing sources would be as follows. First, SMEs will prefer to finance their operations with retained earnings. Secondly, additional equity of the shareholders will be attracted. Thirdly, short-term debt will be an option. Then, long-term debt will be used. Lastly, the firm will issue equity for new shareholders (Duffhues & de Goeij, 2010).

The concept of sustainable growth proposed by Higgins (1997) is also an important theory when studying the capital structure and financing problems of SMEs. It connects well with the pecking order theory (Duffhues & de Goeij, 2010). The sustainable growth of firms is defined as the maximum growth of firms’ sales that can be reached without changing its capital structure. In the optimal situation, debt and equity should grow at the exact same rate. If the sustainable growth is maintained, the balance sheet changes by the same percentage as equity. The

(14)

sustainable growth rate assesses the financial consistency of the SMEs growth plans (Higgins, 1997).

A possible financing gap could be measured by analyzing the sustainable growth and the desired growth rate of SMEs. The financing gap is defined as a shortage of capital to finance new investments. A funding gap is identified if the desired growth rate is higher than the sustainable growth rate.

The frictions could be either on the demand or supply side. Frictions on the demand side can arise due to lack of information, legal restrictions and fiscal regulations. Frictions on the supply side arise because of information asymmetry and a lack of suitable financing instruments (Duffhues & de Goeij, 2010).

Table 3 provides an overview of the discussed market frictions in the SMEs financing

market.

Table 3 Summary of market frictions discussed in economic literature

2.3 Discussion of academic literature and policy studies

2.3.1 Discussion of academic literature

The theories in the previous section predict that four types of market frictions can arise for SMEs. In this section academic literature on market frictions will be discussed.

Research done by Beck (2008) supports the pecking order theory. The results also show that larger firms have easier access to external funds compared to SMEs. Furthermore, it confirms the presence of information asymmetry in the financial market. The data covered the

1 2 3 4

Frictions _assymmetryInformation Difficult access to _{bank lending} legal and tax _regulations Lack of financing _options

Friction Supply/demand Supply Demand Supply

Literature Binks (1992) Berger & Udell (1998)

Duffhues & de Goeij (2010)

Myers & Majluf (1984)

Duffhues & de Goeij (2010)

(15)

period 1995-1999 for 48 countries. Firm and country specific variables were added to the empirical model. Lopez-Gracia and Sogorb-Mira (2008) found empirical evidence for the pecking order theory as well. The data covered 3569 Spanish SMEs over the period 1995 to 2004. In this research the panel data methodology was used. Duffhues and de Goeij (2010) focus in their research on the potential financing gap for Dutch SMEs over the period 2000-2008. The main results are that SMEs follow the pecking order theory when making financial decisions. This implies that long-term debt is often too costly for SMEs due to information asymmetry. However, for the period 2000-2008 no finance gap is found.

In contrast, Serrasquiero et al. (2012) found no empirical evidence for the pecking-order theory. The research is done for firms in Portugal over the period 1998-2005. The methodology employed is the LSDVC dynamic estimator method.

In other studies, statistical evidence is found for the fact that the access to funding is important for the growth of a firm, especially for SMEs. It was first stated in 1931 in the Macmillan Report, noting that SMEs don’t have easy access to funding from banks, capital markets or other suppliers of finance (Lean, 2001). Harhoff et al. (1998) show in their research that large firms with easier access to external funding, grow faster compared to smaller firms which have more difficult access to external funding. Besides, Bechetti and Travato (2002) found empirical evidence for a positive relation between the availability of external finance and the growth of a firm. Firms with higher availability of external financing have higher growth rates than firms with reduced access. Beck et al. (2004) suggest that the access to bank funding becomes more difficult if there is a higher bank concentration in countries. This is mainly true for countries with underdeveloped institutions. McCann et al. (2014) found empirical evidence for the bank power hypothesis as well. As bank power increases, the access to funding for SMEs becomes more difficult. In their researched they focused on 118.000 SMEs across 20 European countries.

In the economic literature it is stated that legal regulation may cause demand frictions in the financing market of SMEs (Duffhues & de Goeij, 2010). Demirguc et al. (1998) find a positive relation between the access to funding and the legal infrastructure of a country. In their research they focused on 30 developed and developing countries. Beck et al. (2005) show that this is especially true for SMEs. In their research they found empirical evidence that financial and legal constraints affect the smallest firms most severely. Underdeveloped financial and legal

(16)

regulations constrain firms in obtaining funding for their investments. In this research the World Business Environment Survey (WBES) is used. It contains developed and developing countries. Especially, a high level of property right protection improves the access to external finance for smaller firms (Beck et al., 2008).

Lastly, Klein (2014) notes that a lack of alternative financing sources puts pressure on the investment plans and overall activity of SMEs. The European Commission database was used in this research and covered 27 European countries for the period 2002 and 2010.

In table 4 a summary is presented of the frictions discussed in the academic literature.

Table 4 Summary of frictions in academic literature

2.3.2 Discussion of the policy studies’ key findings

In this section different reports on the current state of the Dutch SME financing market will be discussed. The key findings will be outlined.

The most important finding in each report is that there is a lack of alternative financing options for SMEs (ACM, 2015; Bain & Company, 2013; Commissie de Swaan, 2011; McKinsey & Company, 2014; PwC, 2011; SER, 2014). Especially alternative funding for small loans is difficult to find for SME entrepreneurs (SER, 2014).

Secondly, the access to funding is difficult for SMEs (ACM, 2015; Bain & Company, 2013; DNB, 2014; PwC, 2011, SER, 2014). According to the report of the DNB (2014) the current state of the economy and the deleveraging of banks have contributed to this. Furthermore, the banks’ perceived credit risk has increased which caused a decline in the supply of credit to

1 2 3 4

Frictions _assymmetryInformation Difficult access to _{bank lending} legal and tax _regulations Lack of financing _options

Friction Supply/demand Supply Demand Supply

Literature Beck (2008) Bechetti & Travato (2002)

Beck et al. (2005) Klein (2014) Duffhues & de Goeij

(2010)

Beck et al. (2004) Beck et al. (2008) Lopez-Garcia &

Sogorb-Mira (2008) Harhoff et al. (1998) Demirguc et al. ₍₁₉₉₉₎ McCann et al. (2014)

(17)

SMEs (DNB, 2014). Further, in the report of Commissie de Swaan (2011) it was stated that structural frictions are especially seen for start-ups and fast growing firms. The access to funding is very difficult for those firms. However, these frictions were already seen in the pre-crisis period, but have become more pronounced in recent years. This was also proposed in the report of PwC (2011).

Another reason for the difficult access to bank funding is the insufficient degree of competition in the Netherlands (ACM, 2015; SER, 2014). In the report of the Dutch consumers and market authority (ACM, 2015) it was stated that in the Netherlands there is not enough competition between banks, which influences the funding possibilities for Dutch SMEs. The three major banks, ABN AMRO, ING and Rabobank, together supply 85% of bank funding to SMEs. As Dutch SMEs mainly depend on these three banks, it is important there is enough competition. A lack of competition could have negative consequences. First, it could lead to higher financing costs for SMEs. Secondly, banks could provide flawed services. Lastly, banks are less willing to invest in innovation. In the report five reasons for the lack of competition are discussed. First, in the recent years no new suppliers have entered the market due to the high entry barriers. In particular the regulations set by the government are very inconvenient for smaller banks. On the one hand, the tightening of bank regulation has made it less interesting for banks to attract each other’s SME clients. Basel III has imposed capital requirements related to the risk-weighted measure of bank assets. SMEs receive a higher risk weight compared to larger firms. On the other hand, SMEs clients are not very willing to look for a new bank and switch. Fourthly, since three major banks dominate the bank funding market it is conceivable that tacit agreements exist. Lastly, alternative funding possibilities are not pressing enough competition yet.

On the one hand information on the creditworthiness and profitability of SMEs is not sufficiently available and too costly to obtain (Bain & Company, 2013; DNB, 2014; SER, 2014). Also, there is a lack of good information on bank lending, government programs and alternative funding options for SME entrepreneurs. On the other hand, for firms it is difficult to acquire funding, because of the high search and transaction costs of new financing (Commissie de Swaan, 2011; DNB, 2014; PwC, 2011, SER, 2014). This especially true for small, fast-growing and innovative firms (PwC, 2011).

(18)

Also, SMEs mainly depend on domestic demand (DNB, 2014; McKinsey & company, 2014; SER, 2014). The decrease of domestic demand because of the financial crisis, had a negative impact on the SME sector (DNB, 2014)

The report of PwC (2011) mentioned five supply frictions in the SME financing market that are not yet discussed. Firstly, acquiring funding through issuing new equity on the stock market is not very popular. Secondly, institutional investors should play a more important role in the financing market. Further, the volume of private equity and venture capital is still low compared to the pre-crisis period. Also, the volume of funding through informal investors is not known. Lastly, funding through family offices should gain more importance.

In table 5 the six most common findings of the policy studies are summarized.

Table 5 Summary of key findings

2.3.3 Discussion of the recommendations of the policy studies

In the policy studies, one of the most important recommendations is to solve the information problem in the SMEs sector. Three different ways to overcome this are proposed.

First, information on financials of SMEs should be improved (Bain & Company, 2013; Commissie de Swaan, 2011; DNB, 2014; Mckinsey & Company; 2014 SER, 2014). This could be achieved by appointing an organization that can provide complete information on SMEs (SER, 2014). Furthermore, one database should be generated (McKinsey & Company, 2014). Another option is to compose a central credit register and prosper a market for assessing the riskiness of SMEs. Also, SMEs could play an important role in overcoming information asymmetry by

1 2 3 4 5 6

Key findings

Lack of non bank funding possibilities

for SMEs

Bank funding is limited because of

new regulations

High search and transaction costs for

start-ups and fast growing firms

SMEs mainly depend on domestic

demand

Information on SMEs too costly and

difficult to obtain

Insufficient competition between

banks

Friction Supply Supply Demand Demand Supply Supply

Policy studies ACM (2015) ACM (2015) Commissie de Swaan (2011) DNB (2014) Bain & Company (2013) ACM (2015) Bain & Company

(2013)

Bain & Company (2013) DNB (2014) McKinsey & Company (2014) DNB (2014) SER (2014) Commissie de Swaan (2011) DNB (2014) PwC (2011) SER (2014) SER (2014) McKinsey & Company (2014) PwC (2011) SER (2014) PwC (2011) SER (2014) SER (2014)

(19)

providing up to date information on their financial situation. If banks would provide more information and guidance, this could be achieved (DNB, 2014). Secondly, the government should provide better information on the different government guarantees (DNB, 2014; SER, 2014). In the OECD (2015) report it is stated that it should be clear what kind of government guarantees exist, the corresponding guaranteed loans amount and lastly what the guaranteed portion of debt is. The third improvement applies to information on alternative funding (DNB, 2014; SER, 2014). According to the SER report alternative funding could partly solve market failure in the funding market for SMEs.

Bain & Company (2013) defines a whole process on EU level to drive information sharing and implementation. Actions have to be undertaken by three different parties, the European Council, the European Commission and the national task forces. A national task force should consist of the most important stakeholders regarding SMEs funding: regulators, business and SME associations, banks and alternative finance providers. The aim of this process is twofold. First, solutions have to be established for building stronger SMEs in each country. Secondly, information must be gathered on successful initiatives and shared with other EU countries;

The second most common recommendation is that governments should facilitate the access to alternative sources of finance (ACM, 2015; Commissie de Swaan, 2011; McKinsey & Company, 2014; PwC, 2011). Also the report of the SER (2014) states that suppliers of alternative funding should be more encouraged to enter the market of SME funding. As such, the competition between banks could be increased (ACM, 2015).

Thirdly, different learning modules and coaching should be provided to SME entrepreneurs (Commissie de Swaan, 2011; McKinsey & company, 2014; PwC, 2011; SER, 2014). When SMEs start to grow entrepreneurs often lack knowledge and experienced employees. Different researches on Dutch SMEs have confirmed this. Entrepreneurs mainly lack financial knowledge. It is likely that this has also contributed to the current state of the Dutch SMEs. Likewise, Mckinsey & Company emphasizes the importance of expanding the supply of training opportunities for SMEs. First, more attention should be paid to learning the skills needed as an entrepreneur for a firm which is in the growth phase. Secondly, the development of lower-educated people should be promoted more. Thirdly, coaching of SMEs could be offered in a

(20)

more professional way, for example by creating one coaching platform for SMEs (McKinsey & Company, 2014).

Another recommendation for the government is that it should adjust regulations for SMEs (Commissie de Swaan, 2011; DNB, 2014; SER, 2014 McKinsey). The SME’s financial situation could be improved by policy changes that aim to develop a better financial system. One way to achieve this is to offer more alternative financing option by taking away or lowering the entry barriers. Also, the fiscal climate should be changed for SMEs so their internal financing capacity can be strengthened and their creditworthiness improved (SER, 2014). Additionally the regulation for hiring new people and the health insurance act should be revised (McKinsey & Company, 2014).

Furthermore, the competition between banks in the Netherlands should be increased. In the ACM report it was stated that the competition between banks in the Netherlands is currently insufficient. Four different recommendations are made in order to improve competition. Above all, the barriers to entry should be lowered for new suppliers. Also, providing better information should decrease the searching costs for SMEs. Consequently, SMEs will switch more easily between banks. The risk of tacit agreements between banks should be reduced: If the number of suppliers increases, it will be more difficult to preserve tacit agreements. Lastly, in order to compensate for the capacity restrictions imposed on banks, regulation for alternative funding should be revised. The reasoning behind this is that by allowing more suppliers of alternative funding, the amount of funding available for SMEs will increase (ACM, 2015).

Lastly, it is recommended that governments should ease the access to equity financing for SMEs (DNB, 2014; PwC, 2011). The two new tools are early stage finance and business angels investment facilities. The aim of these tools is to provide funding for start-ups.

(21)

Table 6 Summary of the most common recommendations of the policy studies

2.4 The relation between academic literature and policy studies

In the economic and academic literature four potential market frictions in the SME financing market are discussed. Firstly, information asymmetry influences the supply and demand of funding. Secondly, supply friction is caused by difficulties in the access to bank funding. Also, the lack of financing options in the financial market may cause a supply friction. Lastly, underdeveloped legal and tax regulations result in demand friction.

The most common finding in the policy studies is that there is a lack of non-bank funding possibilities in the current financial market. Klein (2014) states that this causes friction in the supply of funding, as it negatively influences the investment and overall activities of SMEs.

Secondly, the access to bank funding is difficult for SMEs. According to the DNB (2014)

the current state of the economy and the new regulations imposed on banks have contributed to this. In the academic literature statistical evidence is found that difficult access to funding hampers the growth of a firm and causes a supply friction (Bechetti & Travato, 2002; Beck et al., 2004; Harhoff et al., 1999). Furthermore, in the studies of ACM (2015) and SER (2014) it was stated that in the Netherlands there is a high banking power concentration. According to McCann (2014), this also results in difficulties in the access to funding for SMEs. Furthermore, the regulations set by the government are very inconvenient for smaller banks and providers of alternative funding. As a consequence, also a friction arises due to legal regulations.

1 2 3 4 5 6 Recommendations Improve supply information on SMEs Facilitate access to alternative financing Provide learning modules and coaching for SMEs

Government should adjust regulations

Increase competition banking sector

Facilitate the access to equity for SMEs

Friction Supply/demand Supply Demand Demand Supply Supply

Policy studies Bain & Campany

(2013) ACM (2015) Commissie de Swaan (2011) Commissie de Swaan (2011) ACM (2015) DNB (2014) Commissie de Swaan

(2011) Commissie de Swaan (2011) McKinsey & Company (2014) McKinsey & Company (2014) McKinsey & Company (2014) PwC (2011) DNB (2014) McKinsey &

Company (2014) PwC (2011) SER (2014) McKinsey &

Company (2014) PwC (2011) SER (2014) SER (2014) SER (2014)

(22)

Further, information asymmetry generates frictions on the supply as well as on the demand side of the financing market. On the one hand, the high search and transaction costs are a reflection of information asymmetry for SME entrepreneurs (Commissie de Swaan, 2011; DNB, 2014; PWC, 2011; SER, 2014). On the other hand, frictions on the supply side arise because information on the profitability of SMEs is difficult and too costly to obtain (Bain & company, 2013; DNB, 2014; SER, 2014)

Fourthly, the new bank regulations caused additional supply friction as bank funding became more limited for SMEs (ACM, 2015; Bain & Company, 2013; DNB, 2014; PWC, 2011; Ser, 2014). However, in the economic literature it is stated that legal regulations can cause demand frictions. These possible demand frictions are not discussed in the policy studies.

The only friction that is not discussed in academic literature, is the friction caused by the decline in overall demand. In the policy studies (DNB, 2014; McKinsey & Company, 2014; SER, 2014) it is stated that SMEs are more sensitive to the business cycle.

The above discussion is summarized in table 7.

Table 7 Summary of economic/academic literature and the Dutch policy studies

2.5. The influence of the financial crisis on the SMEs financing market

2.5.1 The supply and demand of bank funding

The financial crisis influenced on the one hand the supply of bank funding by the strengthening of bank regulation. On the other hand, the demand side was affected by a decline in overall

1 2 3 4 5 6

Key findings policy studies

Lack of non bank funding possibilities

for SMEs

Bank funding is limited because of

new regulations

High search and transaction costs for

start-ups and fast growing firms

SMEs mainly depend on domestic

demand

Information on SMEs too costly and

difficult to obtain

Unsufficient competition between

banks

Friction Supply Supply Demand Demand Supply Supply

Frictions identified by economic & academic

literature

Lack of financing options

legal and tax regulations

Information assymmetry

legal and tax regulations Difficult access to

bank lending

Difficult access to bank lending

(23)

demand (Duffhues & Roosenboom, 2010). First, the effect of the new bank regulations on the supply side will be discussed, followed by a discussion of the demand side

In 2010 the Basel Committee on Banking Supervision (BCBS) introduced a new accord, known as Basel III. It is an improvement on the Basel II accord, which was introduced in 1960. The aim of Basel III is financial stability. In order to achieve this, the solvency and the liquidity of banks have to be improved. The Basel III accord consists of three main elements. First, the minimum capital requirement has increased since it depends on credit ratings of the loans. It also imposes capital requirements related to the quality of capital. Capital has to be of the highest quality, so banks can bear the losses caused by shocks. Secondly, liquidity ratios are introduced. Banks have to maintain these liquidity ratios in order to ensure short- and long-term stability. Thirdly, the leverage ratio limits the leverage of banks in order to avoid destabilizing leveraging processes (Cardone-Riportella et al., 2011).

According to Padgetti (2012), in the long run firms can profit from financial stability that

can be achieved with Basel III. Especially small businesses will profit from financial stability, since they are more sensitive to economic fluctuations. However, in the short run the new regulations will negatively affect SMEs. The strengthening of bank regulation has imposed capital requirements related to the risk-weighted measure of bank assets (CEPR, 2015). Since SMEs in general have fewer assets to offer as loan collateral, the risks associated with SME lending are high (Klein, 2014). Hence, the unrated SMEs and start-up companies will receive a risk weight of 100% or 75%, compared to a 20% risk weight for large firms and 0% weight for government bonds. The risk weights determine the amount of capital that banks are required to retain. It will encourage banks to concentrate on low-weighted assets and extend fewer loans to SMEs. A higher risk weight also increases the risk premium charged by banks, which makes a loan more expensive (OECD, 2012).

The decreased credit availability and the higher costs have several consequences. First, the decreased credit availability will increase the competition of acquiring a loan between SMEs. The risk weight system doesn’t make a difference between firms with high profit potential or modest profits. Hence, only firms with high profit potential will be able to afford the higher lending costs associated with the higher risk weight. Furthermore, because SMEs are so important for innovation and job creation and primarily depend on bank lending, there will be less innovation and employment could decrease (Padgetti, 2012).

(24)

As discussed previously, besides the supply of bank funding also demand is affected by the financial crisis. The financial crisis caused a decline in overall demand, which reduced the production levels of firms, hence the demand for loans (Giovannini et al.,, 2015). Mian and Sufi (2012) find empirical evidence that a decrease in aggregate demand causes a decline in firms’ capital demand. Uncertainty about future profits increases, so firms decide to decrease their investments. According to Duffhues and Roosenboom (2010), the demand for funding depends on the increase of investments in fixed assets and working capital. If overall demand declines, firms tend to postpone their planned investments and the demand for funding will decrease accordingly. Furthermore, a decline in the number of new enterprises and an increase in bankruptcies further reduces the demand for funding.

The availability of bank funding became more difficult because of the new bank regulations. However, certain firms like start-ups and fast growing firms, still have funding needs. As a response, In the Netherlands a number of government schemes and alternative finance possibilities have arisen since the crisis. In the next section the different non-bank funding alternatives will be covered.

2.5.2 Non-bank funding: government and institutional investors

As a response to the financial crisis governments have used different instruments in order to ease the access to funding for SMEs. This was done on a European level as well as on a national level. There are several instruments implemented by the European Union to make funding available for SMEs. Two of these programs are mentioned in the report of the SER. The first instrument is Horizon 2020, an innovation program for the period 2014 till 2020. The aim of the program is to improve the competitiveness of Europe, by investing in innovation. In total €7 billion of funding is made available for innovative SMEs. The second instrument is the COSME-program: EU competitiveness of Enterprises and SMEs - program (SER, 2014). The program runs from 2014 till 2020. It has a planned budget of €1.3 billion. By working together with financial intermediaries the total funding available for European SMEs will amount to approximately €25 billion. The aim of the program is to encourage banks to lend to SMEs which normally are unable to obtain a loan, because for example they have insufficient collateral. In order to achieve this, the program provides guarantees to the participating banks.

(25)

Also in the Netherlands, a number of government and institutional initiatives have arisen. In 2009 the Dutch Government and several national banks launched Qredits. Qredits is an institution that offers microcredit to SMEs. Their mission is to help entrepreneurs to successfully start a business or to facilitate the further growth of their business. Since 2009 the total amount of support granted is €80 million (McKinsey & Company, 2014).

Next, three government loan guarantees have been initiated in order to support lending to SMEs (OECD, 2015). First, the guarantee scheme for SMEs (BMKB) is meant for enterprises with insufficient collateral to obtain a loan. The government guarantees 45% of the bank loans up to €3 million. In this way the risk for banks is lowered and makes the bank more willing to provide loans. The second guarantee scheme is called the growth facility (gFac). The government offers banks and private equity firms a guarantee of 50% on equity up to €20 million. The growth facility is available for SMEs in the growth stage. The total amount of funding available is €170 million. Lastly, the guarantee for entrepreneurial finance (gO) gives banks 50% guarantee on new loans from €1.5 million up to €50 million (McKinsey & Company, 2014).

Institutional investors have also initiated several financing sources focused on SMEs. One of those initiatives is the “MKB impulse fonds”. Together with several insurance companies, ABN AMRO established a fund which will provide approximately €300 million of funding to SMEs. The bank has the resources and experience to assess the risk of each SME. The insurance companies and the ABN AMRO each contribute 50% of the loan amount. This way they equally share the risk and the profit of each investment. The NL Ondernemingsfonds (NLOF) is also a collaboration, this time between banks, pension funds and also the Euronext stock exchange. The aim is to provide funding to enterprises with an annual turnover of more than €25 million. This fund focuses on medium-sized and large firms and provides loans of at least €10 million. The total amount available for funding is €1 billion. Thirdly, in total thirteen institutional pension funds and insurance companies established the Nederlandse Investeringsinstelling (NII). De NII will invest in infrastructure, education, healthcare, renewable energy and in the SMEs sector. The objective of the NII is to offer firms a long-term financing possibility. The NII will collaborate with the three major banks, ABN AMRO, ING, Rabobank, as they will provide the bank credit. By co-financing an investment, the total capacity of funding will be increased. The Achtergestelde Leningen Fonds (ALF) is a fund specifically for SME entrepreneurs. The fund provides subordinated loans from €150.000 up to a maximum of €5 million to SMEs with growth

(26)

potential. The total amount of support granted for the coming three years, is approximated at €1 billion (SER, 2014).

2.5.3 Non-bank funding: new alternative financing options

Besides initiatives of the government and institutional investors other alternative funding possibilities have arisen. These are called the new alternative funding options (McKinsey & Company, 2014).

First, according to the European Union crowdfunding can be seen as an important instrument that can improve the access of SMEs to funding (ECD, 2014). In the Netherlands crowdfunding is becoming a more important source of funding. Multiple crowdfunding platforms have been established in recent years. However, the platforms usually operate differently. Some platforms focus on one specific target group, like for example sustainable enterprises (ACM, 2015). The amount of funding generated in the crowdfunding market is estimated at €32 million (McKinsey & Company, 2014).

Furthermore, Credit Unions have grown in importance since the financial crisis. A credit union is a non-profit cooperative that offers the same services as a bank, but is owned by the members who use the services. It is also known as peer-to-peer financing, since individuals lend money to other individuals without using traditional financial institutions (Giovannini et al., 2015). The members of a credit union are entrepreneurs of the same industry who operate in the same region. Funding is provided to local SMEs of the same industry. An advantage of a Credit Union is that it has the required knowledge and experience to adequately assess the risk of an investment since they operate in the same industry. However, credit unions are sensitive to risk, especially in the start-up phase as it is initiated by a small group of entrepreneurs. Also, the entrepreneurs operate in the same industry. As a consequence, there is no diversification of the investments (SER, 2014). The total amount of funding of Credit Unions in 2014 is approximated at €2 million.

The Nederlandsche Participatie Exchange (NPEX) is an online stock exchange market for SMEs. It provides funding to firms who are in need of growth capital. Firms can issue either shares or bonds on the exchange market. The aim of NPEX is to make it possible for investors to

(27)

invest in the SME sector. The total amount of assets managed on the NPEX is €314 million. (McKinsey & Company, 2014)

2.5.4 Non-bank funding: the securitization market for SMEs

The European commission states that a securitization market for SMEs could be another alternative to bank lending. Securitization is the process of pooling a large number of SMEs assets, as for example cash flows, loans and leases, and transforming them into a publicly issued debt security. However, in Europe the securitization market for SMEs is currently underdeveloped (ECB, 2014). According to the OECD (2015) report a safe and high-quality market could be accomplished by removing the following barriers. First, more complete credit data of SMEs should become available. Also, the awareness among SMEs should be increased. Additionally, investors lack confidence in the quality of the underlying assets. As a consequence the information costs for investors are high (Bain & Company, 2013).

An overview of the non-bank funding options for Dutch SMEs is presented in table 8.

Table 8 Summary of the non-bank funding possibilities in the Netherlands

Non-bank funding possicilities for SMES Debt /Equity

The amount of support granted

Traditional financing

Leasing OECD (2015), SER (2014), ACM (2015) , McKinsey & Company (2014)

Debt N/A Factoring OECD (2015), SER (2014), ACM (2015) ,

McKinsey & Company (2014)

Debt N/A

Government and institutional investors

Horizon 2020 SER (2014) Debt The total amount of support granted is €7 billion for the period 2014-2020 COSME-Programme SER (2014) Debt The total amount of support granted is €25 billion for the period 2014-2020 Qredits OECD (2015), ACM (2015), McKinsey &

Company (2014)

Debt The total amount of support granted is €80 million since 2009

BKMB OECD (2015), DNB (2014), SER (2014),

ACM (2015), Bain & company (2013), Mckinsey & Company (2014)

Debt The total amount of support granted is €765 million

gFac OECD(2015) Debt The total amount of support granted is €170 million

gO OECD (2015), DNB (2014), SER (2014),

ACM (2015), McKinsey & Company (2014)

Debt N/A

MKB impulsefonds SER (2014) Debt The total amount of support granted is €300 million

NLOF SER (2014) Debt The total amount of support granted is approximated at € 1 billion NII SER (2014), McKinsey & Company (2014) Debt The total amount of support granted is approximated at €1

New alternatives

Cowdfunding OECD (2015), SER (2014), ACM (205), Bain& Company (2013)

Debt The total amount granted is approximated at €32 million in 2014 Credit Unions SER (2014), ACM (2015), McKinsey &

Company (2014)

Debt The total amount granted is approximated at €2 million in 2014 NPEX SER (2014), ACM (2015), McKinsey &

Company (2014)

Debt /Equity

The total amount traded is approximated at €314 million

Other

Securitisation OECD (2015), DNB (2014), SER (2014),

(28)

2.6 Motivation for this study

To summarize this chapter, in the economic and academic literature four potential frictions in the SMEs financing market can be distinguished. Firstly, information asymmetry influences the supply and demand of funding. Secondly, a supply friction is caused by difficulties in the access to bank funding. Also, the lack of financing options in the financial market could cause a supply friction. Fourthly, underdeveloped legal and tax regulations cause a demand friction. After reviewing Dutch policy studies, these four frictions seem to be present in the Dutch financing market of SMEs. These frictions were already seen in the pre-crisis period, but have become more pronounced in recent years.

Fazzari et al. (1988), state that for firms that are more constrained in the financing market, by for example market frictions, a stronger relation can be found between investments and internal funds. In the previous sections, the theory of Rajan (1992) was already discussed. According to Rajan (1992), as firms grow they become less dependent of bank funding.

In the next chapters we will investigate the market frictions in the Dutch financing market for SMEs by combining the theories proposed by Fazzari et al. (1988) and Rajan (1992). The following can be implied if these two theories are combined: frictions in the SMEs financing market lead to financing constraints for SME entrepreneurs, which make them more dependent of internal funds because of their high bank dependence. As such, a stronger relation between the profitability and the change in investment is expected for smaller firms than for larger firms. As a consequence the concrete research question “To what extent do firms with higher bank

dependence show a stronger relation between profitability and fixed investments?” will be

(29)

3. Data and descriptive statistics

In order to answer the research question, the balance sheet variables of a sample of Dutch SMEs and large enterprises are described first. A comparison analysis of the pre-crisis period and post crisis period is presented. Secondly, the most common industries in the sample are covered. Lastly, the correlation between fixed investments and three probability measures will be discussed.

3.1 Data description

The data is obtained from Bureau van Dijk (BvD), a provider of private and public business information. The database used is AMADEUS. It contains financial information on more than 20 million public and private firms from 43 countries. Bureau van Dijk obtains its information from different company register offices all over the world. The company register offices require firms to share their financial information. However, smaller firms are not obliged to annually report their financial situation. As a consequence, the database doesn’t contain all firms and the information per firm could be incomplete (ECB, 2013). The acquired information is processed by data specialists on a daily basis. Next, information from different sources on the same firm is being matched. This is followed by a quality check on the acquired information. Lastly, daily updates on the financial information of firms are being added to the database (Bureau van Dijk, 2015)

The focus of this research is the Small and Medium-sized Enterprises (SMEs) sector in the Netherlands over the period 2006-2013. In the Netherlands 99.8% of the firms are SMEs and together they account for 65% of employment (OECD, 2015). Since SMEs account for such a large proportion of the Dutch economy, it is important to also analyze the development of funding of SMEs.

First, observations with a missing value of the number of employees were deleted from the dataset. After the elimination 326.568 firms are left in the 2006 sample and 384.789 in the sample of 2013. In the previous chapter the different definitions of SMEs were discussed. It is agreed upon that SMEs are firms with no more than 250 employees. The European Union classifies small and medium-sized enterprises (SMEs) into three categories: micro, small and medium. However, the Dutch (governmental) Social and Economic Council (SER) includes a

(30)

fourth category: Independent contractor. In the Netherlands most of the SMEs are independent contractors and micro enterprises, therefore the data on SMEs will be split into four categories as proposed by the SER. In this research the number of employees is used as discriminator to decide a firm’s status. Thereto the firms in the sample are classified into five categories according to the number of employees. The first category, independent contractor, consists of firms with one employee. The second category, micro enterprises, includes firms with 2 till 9 employees. The third category is the one of small enterprises; firms in this category have between 10 and 49 employees. Next the category of medium-sized enterprises contains firms that have 50 to 250 employees. The last category includes large firms with more than 250 employees. The large enterprises are included in the sample in order to perform a comparison analysis between SMEs and large enterprises.

Table 9 Fraction of SMEs and large firms in the sample

As can be seen in table 9 the SME fraction in the sample is fairly constant over time with values of 99.6% and 99.7% in 2006 and 2013 respectively. As stated in the report of the SER most Dutch SMEs are independent contractors and micro enterprises. In 2006 and 2013, they account for respectively 86.1% and 85.8% of the total firms included in this dataset. However, the number of independent contractors included has decreased, while the number of micro firms has increased. As the AMADEAUS dataset contains up to date information, this could imply two things. Compared to 2006, less independent contractors have submitted their financial information or more independent contractors have gone bankrupt between 2006 and 2013, compared to micro enterprises. Another possibility is that some independent contractors in 2006 have grown to become micro firms.

Firm size number (full time employees) 2006 Freq. 2013 Freq. Δ%

Independent contractor 1 152838 0.468 148809 0.387 -2.6 Micro 2 - 9 128354 0.393 181265 0.471 41.2 Small 10 - 49 37266 0.114 43155 0.112 15.8 Medium 50 - 250 6719 0.021 10333 0.027 53.8 Total SMEs 325177 0.996 383562 0.997 18.0 Large > 250 1391 0.004 1227 0.003 -11.8 Total 326568 100% 384789 100%

(31)

According to Cassar (2004) survivorship bias has to be considered when doing empirical research on SMEs. During the sample period, the financial crisis took place and negatively impacted SMEs. Firms that went bankrupt between 2006 and 2013 were excluded from the sample. As a consequence, the results are biased since only companies which ‘survived’ until the end of the period are included. The firms that have survived could have some specific characteristic that influenced their access to external funding. Additionally, firms could have dropped from the sample because of other reasons.

In the dataset the national industry code of each firm is included. These are called the Dutch BIK classification codes. If a firm registers at the Dutch Chamber of Commerce (Kamer van Koophandel) it gets an industry code. In figure 1 the percentage of firms of the ten most common industry codes is presented for the years 2006 and 2013. As can be seen, in both years approximately 35% of the firms in the sample operate as a (financial) holding. A holding company doesn’t produce goods or services. However, it owns stocks of another firm in order to control it. Firms often use this structure in order to benefit from certain tax advantages. The problems regarding access to funding usually don’t hold up for this kind of firms. Therefore, it is important to note the percentage of the firms included in this sample. The same applies to investment funds. As they invest money rather than demanding it.

(32)

Lastly, the balance sheet variables that were investigated are summarized in table 10. Three variables that measure the profitability of the firms are included: Operating revenue, earnings before interest and taxes (EBIT) and profit. Operating revenue and EBIT both measure income earned by a company with its day-to-day business operations. However, EBIT includes adjustments that are not accounted for in operating revenue. One example is the treatment of allowances. This is the reason why these two variables should not be compared directly. The last measure of profitability is the profit, which are the earnings after interest and taxes.

The variables financial revenue and financial expenses are defined in the following way: Financial revenue is the income earned by owning or renting a fixed or current asset. On the contrary, financial expenses include the expenses paid on interest, fees and commissions for the liabilities of a firm.

Table 10 Balance sheet variables

Variables

Fixed assets

Tangible fixed assets Current assets current assets:debtor Total assets

Shareholder funds:capital Non-current liabilities

Non-current liabilities: long term debt Other non current liabilities

Current liabilities

Current liabilities: creditors Working capital

Operating revenue Financial revenue Financial expenses

(33)

3.2 Descriptive statistics

In this section the data of the five categories in the sample will be described. A comparative analysis of the pre-crisis and post-crisis period is presented. The pre-crisis period is 2006, since the collapse of the Lehman Brothers was in 2007 and is seen as the onset of the financial crisis. The post-crisis year was chosen to be 2013, because the recession was over and the economy was

in significantly better shape than in 2008

.

Summary statistics about the variables that are studied

will be provided. Also, the five most common sectors in which the firms operate of each category will be presented. Lastly, the median of the long-term debt in each sector will be compared.

3.2.1 The sample of independent contractors

3.2.1.1 Independent contractors: median and standard deviation

As can be seen in table 11 the number of independent contractors included in the sample has decreased. The median of almost all variables decreased between 2006 and 2013. The median of the fixed assets has increased by 3.56%. Also an increase can be seen for the median of tangible fixed assets. The median of total assets increased by 1.72%.

Compared to 2006 the operating revenues and financial revenues increased. Operating revenues is income generated with the day-to-day activities of the firm, whereas financial revenues are the revenues obtained by renting an asset or property. Even though an increase in revenues can be seen, the mean of the earnings before interest and taxes (EBIT) became even more negative. In 2006 the financial expenses are more than ten times higher than EBIT and in 2013 more than five times. Lastly, the median of the variable profit decreased by more than 70%. In this sample the median of the three profitability measures are far apart. In the previous section it is stated that the three profitability measures should not be compared directly, as the accounting adjustments are not precisely known. Also, it is important to note that the numbers of observations of these variables are just a small fraction of the total sample.

Lastly, the standard deviation measures the spread of the data around the mean. In table

SMEs bank dependence : the relationship between profitability and investments for Dutch SMEs