SMALL BUSINESS INVESTMENT COMPANIES - FINANCIAL CHARACTERISTICS AND INVESTMENTS

Small business investment companies (SBICs) provide long-term financing to companies whose prospects and profits are difficult to evaluate and monitor by other investors. Banking organizations, which play a major role in providing short-term financing to small firms, use SBICs to channel long-term funds to small businesses. This paper examines the financial characteristics, investment patterns, and profitability of SBICs. The results show that the types of activities and industries financed by debt and equity investments are consistent with theories of asymmetric information and agency costs of external financing. In addition, the relationship between the profitability and characteristics of SBICs suggests that allowing banks to participate in the SBIC program provides advantages to small businesses, and that direct government subsidies are not required to enable investments in small businesses to be profitable in the long run.