Frontiers of Entrepreneurship Research
1996 Edition

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Barbara J. Orser (1)
Allan L. Riding (2)

(1) School of Business
Carleton University
1125 Colonel By Drive
Ottawa, Ontario, K1S 5B6

(2) School of Business Management
Ryerson Polytechnic University
350 Victoria Street
Toronto, Ontario, M5B 2K3

(1) 613-788-2600 Ext. 2394
(2) 416-979-5000 Ext. 6734

Principal Topics

This paper addresses three aspects of the issue of access to equity capital.

1. The paper reports on an investigation of factors that inhibit equity capital formation. Two factors, external barriers and knowledge barriers, are identified.

2. The study examines the importance of non-response bias inherent in mail surveys.

3. The attitudes of small business owners with respect to success, growth, and the use of equity funding.


The findings use three sets of data.

First, in the fall of 1994, the Canadian Labour Market and Productivity Centre (CLMPC) conducted a telephone survey of a random sample of small firm owners. This survey resulted in 1,004 respondents, a 63 % response rate. These data provide a baseline for analysis of barriers to capital.

Second, the Canadian Chamber of Commerce administered by mail to its membership the same survey as that used by the CLMPC. A total of 463 responses were received, a 14 % response rate. While identical in every respect save the means of administration, findings from the two sets of data diverge in important respects, divergences that address the second objective of this study.

The third data set comprises transcripts and video-tape data from 11 groups, comprising 79 small business owners. Qualitative data analysis was employed to analyze owner’s attitudes to growth and equity capital from these data.

Major Findings

Previous research on finance as a barrier to capital relied almost exclusively on mail-based surveys. Such surveys involved survivorship biases, selection biases, and non-response biases. This study finds that the impact of non-response bias alone may be far greater than had previously been anticipated and might be sufficient to disqualify findings of research based exclusively on mail-based surveys.

Many business owners are reluctant to seek equity capital from the capital markets. This reluctance, a reluctance predicted from the theories of Myers and Majluf, leads owners to prefer internal funds to external, and external debt to external equity. Those owners who do seek external equity capital face two types of hurdle. External barriers represent the requirement of investors in terms of control and rates of return. Knowledge constraints relate to the ability, or, more frequently, the inability of the firms’ own managements to understand financial markets.

Accordingly, the study also uses qualitative data analysis of focus groups to investigate the attitudes of small business owners with respect to success, growth, and the use of equity funding. The findings are consistent with the "pecking order" theories of Myers and Majluf(and others). New insights about business owners’ attitudes towards growth are provided.


Because of the three type of survey biases, it is likely that the role of capital availability as a barrier to the growth of small firms may have been overstated. More important hurdles to the use of external equity are attitudinal predispositions of the owners themselves and their own knowledge about the capital marketplace.

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