The impact of external financing on firm value and a corporate governance index: SME evidence

Abstract

Purpose

The purpose of this paper is to investigate the effect of external financing needs on both firm value and corporate governance mechanisms within the UK SME context. This framework is of importance because of the limited external financial resources SMEs might face.

Design/methodology/approach

The authors consider the endogeneity problem between corporate governance mechanisms and firm value, and hence, the three stages least squares and the instrumental variables based on two stages least squares estimation methods are employed.

Findings

The authors find a positive relationship between external financing needs and firm value. In addition, the authors detect that size and profitability are positively associated with firm value in the sample. Concerning the corporate governance index (CGI), the authors detect that big SMEs and those with low-debt levels have better corporate governance structures.

Originality/value

The authors employ a CGI for the sample which is constructed using ten corporate governance variables. The authors also examine different factors that affect SMEs 2019 governance by applying different models including logistic analysis.

Citation

Al-Najjar, B. and Al-Najjar, D. (2017), "The impact of external financing on firm value and a corporate governance index: SME evidence", Journal of Small Business and Enterprise Development, Vol. 24 No. 2, pp. 411-423. https://doi.org/10.1108/JSBED-11-2016-0172