SME equity financing: Culture and home truths

Page 16 

©REUTERS/Kai Pfaffenbach

Let’s face it: the bulk of small and medium-sized entreprises (SMEs) are still financed mainly by bank credit. However, as bank finance is harder to come by in the current post-crisis environment, fostering non-bank financing alternatives may help closing an SME financing gap. The OECD has been looking into such issues, using input from the private sector via its financial roundtables.

The overall challenge was described as how to stimulate equity financing for a segment that is characterised by low survival rates and a large diversity of entities, the two main drivers that make it difficult to assess risk. The focus of the debate was more on analysing the current drivers of a challenging environment for SME equity financing and less on solutions.

Let’s focus on a more fundamental driver of an investor´s motivation to ensure a sustainable flow in SME equity investments: cultural change.

The lack of a risk equity culture across Europe is an important obstacle. In Germany only 13.8% of the population invests in listed equity securities, compared with around 50% in the US. Both the US and Germany have seen a slight deterioration in equity ownership since 2000, explained by the long-term effects of the dot.com bubble during the 2000s and the pro-cyclical behaviour of retail and institutional investors, leading to a reduction in their exposure caused by the Great Recession.

How can this trend of sinking equity ownership in Germany and neighbouring countries be reversed? Let’s analyse what drove the rise of equity owners in Germany from 3.9 million in 1992 to 6.2 million in 2000 and back down to 4.5 million by 2013. Two main factors can explain the rise: pro-equity friendly sentiment in politics; and accessible home bias lowering the entry barrier for investors.
 
The dot-com bubble deformed the first. Since it burst, politicians have been stigmatising equity markets as too dangerous to get exposed to. The Great Recession acted as reaffirmation of their convictions. Some even enacted policies to forcefully dry up market liquidity, as seen in Austria with its stock exchange tax.

The dot.com bubble also caused millions of Germans to divest their home bias. Home bias is well-researched in behavioural finance, driven by both rational and irrational factors. Local bias in SME investments is driven by: pride of local ownership; ambiguity aversion (investors are more likely to choose an option with known risks over unknown risks, and with fewer unknown elements rather than many); identification with product, service or entrepreneur; and reduced information asymmetry through local knowledge.

Sourcing information globally on listed companies works well thanks to its digital distribution, but identifying yourself with them doesn’t. The affinity to an equity home bias for both institutional and retail investors can be used as an entry point for changing the equity culture in Europe.

Extract: the full version of this post appeared on oecdinsights.org on 3 December 2014.

Mr Schuller participated in financial market roundtables at the OECD in 2014.


©OECD Observer No 301, Q4 2014




Economic data

GDP growth: +0.6% Q3 2017 year-on-year
Consumer price inflation: 2.3% Sept 2017 annual
Trade: +4.3% exp, +4.3% imp, Q3 2017
Unemployment: 5.7% Sept 2017
Last update: 14 Nov 2017

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly


Online edition
Previous editions

Don't miss

  • Rousseau
  • Do you trust your government? The OECD’s How's life 2017 report finds that only 38% of people in OECD countries trust their government. How can we improve our old "Social contract?" Read more.
  • Papers show “past coming back to haunt us”: OECD Secretary-General Angel Gurria tells Sky News that the so-called "Paradise Papers" show a past coming back to haunt us, but one which is now being dismantled. Please watch the video.
  • The annual OECD Eurasia Week takes place in Almaty, Kazakhstan 23-25 October. Writing in The Astana Times, OECD Secretary-General Angel Gurría urges Eurasia countries to stay the course on openness and international integration, which has brought prosperity but also disillusionment, notably regarding inequality. The OECD is working with this key region, and Mr Gurría urges Eurasia to focus on human capital and innovation to enhance productivity and people’s well-being. Read more.
  • When someone asks me to describe an ideal girl, in my head, she is a person who is physically and mentally independent, brave to speak her mind, treated with respect just like she treats others, and inspiring to herself and others. But I know that the reality is still so much different. By Alda, 18, on International Day of the Girl. Read more.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Read some of the insightful remarks made at OECD Forum 2017, held on 6-7 June. OECD Forum kick-started events with a focus on inclusive growth, digitalisation, and trust, under the overall theme of Bridging Divides.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • How do the largest community of British expats living in Spain feel about Brexit? Britons living in Orihuela Costa, Alicante give their views.
  • Brexit is taking up Europe's energy and focus, according to OECD Secretary-General Angel Gurría. Watch video.
  • OECD Chief Economist Catherine Mann and former Bank of England Governor Mervyn King discuss the economic merits of a US border adjustment tax and the outlook for US economic growth.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2017