THE EFFECT OF FINANCIAL CRISES ON SMALL FIRMS: A REVIEW OF LITERATURE

Abstract

This paper aims to review and provide further insight into the exposure of small firms to
credit supply shocks; and to highlight and identify factors that are likely to be
responsible for making them vulnerable to the credit crises.
The research approach adopted in this study is similar to the deductive method. In other
words, the research technique is based on the critical analysis of the findings of the
existing published literature.
The study highlights that there are conflicting findings in the existing literature
regarding the impact of credit drought on the investment decisions and financial
performance of small enterprises. However, greater trust is placed on the view that
shifts in the supply of credit can have adverse consequences for the investment policies
and financial performance of small enterprises. The research further highlights that
information asymmetry, lack of collateral, few financing options and heavy dependence
on banks are some of the factors that may explain why small firms are more exposed to
credit supply shocks.
The study is a step towards better understanding the behaviour of small enterprises
especially during the period of credit crises. However, the limitation of this study is that
it is based on the interpretation of the results of the existing published studies.