Microenterprise financing preference: Testing POH within the context of Ghana's rural financial market

Abstract

Purpose-The purpose of this study is to investigate the determinants of financing preference of Micro and Small Enterprises whilst distinguishing a broader range of financing sources beyond what is typically the case within the corporate finance literature. Design/methodology/approach- Under the framework of ordinal logistic regression, the study also tests whether there is evidence of hierarchical preference ordering as predicted by POH using field survey data for 2009. Findings We relate that new enterprises are more likely to prefer low cost and less risky or less formal financing such as internal or bootstrap finances. However, as the enterprise gets established or matures its capacity to seek formal financing increases thereby becoming more likely to prefer or being in a higher category of formal financing. While we affirmed the POH, we argue that this order is a consequence of severe persistent constraints other than sheer preference. Our findings further reveal that, microentrepreneur’s and MSE’s-specific level socio-economic characteristics such as owner’s education or financial literacy status, households’ tangible assets, ownership structure, enterprise size as well as sensitivity to high interest rates in the credit market are important determinants of either past (start-up), present or future financing preference. Originality/value- The main value of this paper is to analyse the determinants of financing preference of Micro and Small Enterprises within the context of rural financial market from a developing country perspective.