Assessing and measuring the equity gap and the equity requirements for innovative SMEs

This paper sets out to critically review the different approaches developed for the assessment and measurement of the equity gap for innovative firms, mainly SMEs, extending the quantitative approaches for equity gap developing a demand-side model that allows to predict the future demand for equity in precise terms. Through the application of an original model to a sample of Italian firms, we find that, the amount of equity needed, expressed in absolute terms, is on average tiny (147.3 K euro). Moreover, the size of the additional equity requirement is clearly influenced by the role of the current debt. The results of the cluster analysis confirm that the degree of innovation cannot be considered the main discriminating factor when it comes to the differences in equity requirement per unit of marginal sale; while the regression analysis reveals the pivotal role played by the enterprise’s year of foundation.