Equity capital needs of growth SMEs : financial obligation or strategic intention ?
Usually, Small and Medium-Sized Enterprises (SMEs) are supposed to raise equity capital when they are not able to finance growth by internal funds. Nevertheless, if we observe the financial behaviour of growth SMEs, financial constraint seems not to be the only determinant of raising equity capital. The paper investigates if the aim of managers is not also to have financial slack. We study 2 161 SMEs localized in Rhône-Alpes in France. To measure the need of equity capital, we use free cash flows (cash flows less capital expenditure less change in working capital). The study finds three kinds of SMEs raising equity capital. Surprisingly, one kind of SMEs raises funds whereas they have positive free cash flows (that means that these SMEs have no needs of external funds). The second kind of SMEs raising equity capital is not performant for investors and the last kind of SMEs needs equity funds and is performant for investors. The empirical results also show that the characteristics of all of the kinds of SMEs that raise equity funds are a large size, high growth, high capitalistic intensity and low performance. But the variables sector and age of the SMEs are characteristics specific to SMEs with equity capital need, whereas the variables innovation and export characterize industrial SMEs that need external funds.