1 Department of Business Studies, Aarhus School of Business, Aarhus BSS, Aarhus University2 Finance Research Group, Aarhus School of Business, Aarhus BSS, Aarhus University3 Department of Economics and Business Economics, Aarhus BSS, Aarhus University4 Greenwich University London5 American University of Sharjah6 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
This paper tests for "pecking order" financing of small and medium size firms. The main sources and "pecking order" of financing for SMEs are equity (internally generated cash), trade credit paid on time, credit provided by institutions such as banks and leasing companies, other sources of debt and delayed payment on trade credit. The "pecking order" of financing is driven by the costs of asymmetric information (cost of gathering and analysing information) and financial distress costs. Empirical tests do not confirm that SMEs follow a pecking order.