83rd International Atlantic Economic Conference

March 22 - 25, 2017 | Berlin, Germany

Financing of small- and medium-size enterprises with exchange traded funds and venture capital

Friday, 24 March 2017: 15:30
Thomas Poufinas, Ph.D. , Economics, Democritus University–Thrace, Komotini, Greece
Maria Polychronou, MSc , Mathematics, University of Athens & Athens University of Economics and Business, Athens, Greece
Small- and medium-size enterprises (SMEs) seek funding so as to start their operations, expand or grow. There are several financing methods, such as bank lending, exchange traded funds (ETFs), private equity - venture capital (VC), crowd funding, leasing, factoring, business angels (angel investors), and incubators. Bank lending, which is usually the most popular financing route, is becoming hard to access, as in several countries the banking sector has suffered as a result of the financial crisis. Consequently, SMEs are looking for alternative sources of funds. ETFs and VC emerge more and more as potential choices to address this need.

In this paper we attempt to study the financing of SMEs primarily through ETFs and secondly through VC. We present the approaches followed in various countries, including European nations and the USA.

We use econometric methods to identify the relationship between variables relevant to the ETF market size and indices that reflect the overall condition of the economy in the different countries. The variables we employ are the number of ETFs that are domiciled or are available per country, the total number of ETFs that invest in each country, the total number of ETF assets, the size of the underlying market, the risk-free rate, the return of the benchmarking index, the ease of doing business, the tax regime, the regulatory framework, the gross domestic product (GDP), and the unemployment rate. In addition, we perform a qualitative analysis by comparing the sector allocation and the geographical breakdown of the holdings of the ETFs.

We apply a similar methodology to the VC market. Moreover, we examine the relationship between the ETF and VC variables.  We are in particular interested in deriving potential recipes that could be applied to countries where the traditional sources of financing do not properly operate as a result of the adverse economic environment. On one hand SMEs are the backbone of the economy in such countries, and on the other hand SMEs are looking for sources of capital beyond bank lending.