Evidence on Funding Decisions by Italian SMEs: A Self-Selection Model?

This paper sets out to analyse the determinants of Italian SMEs’ choices of sources of finance, with specific reference to the role of informed (internal) capital compared to other forms of finance. In this work, we aim to identify the determinants of the mix of sources of finance using data from the Survey of Italian Firms conducted by Capitalia, bearing in mind the structural characteristics of the firms and the banking market, and the problems of the information asymmetry between the bank and the firm. Although the financial hierarchy theory suggests that firms prefer selffinancing, because it is less expensive in economic terms, relationships with local banks may offer advantages which encourage firms to enter into debt contracts even in the absence of binding internal constraints. The empirical study focused in particular on the role of self-financing as an alternative to external sources. In order to measure the decision to use self-financing and the subsequent composition of the financing mix, we used different techniques, first independent models and then a self-selection model. The first results, in line with the pecking order theory, confirm an approach comprising an initial check on the availability of internal resources, followed if by the use of external capital, including bank debt. JEL classification: D21; G21; L1