Small Firm Investment under Uncertainty: The Role of Equity Finance by Muhammad Meki published by QEH-University of Oxford (8/2024).
Private enterprise development in low-income countries remains elusive, and the failure of microcredit to stimulate small firm growth poses a puzzle to the finance and development literature. Combining data from artefactual field experiments, two field experiments, and structural estimation, I show that equity-like contracts stimulate more profitable investments, and I find a novel and nuanced role for risk preferences. Loss-averse individuals prefer equity, but the substantial portion of individuals who overweight small probabilities prefer debt. I demonstrate that equity-like contractual innovations that incorporate these insights – and are increasingly feasible due to FinTech developments – can unlock small firm investment.