Abstract

This paper examines how capital market imperfections constrain small business financing, growth, and performance in the United States. Drawing on the theoretical frameworks of Beck (2013), Sommer (2024), Stiglitz and Weiss (1981), and Song and Thakor (2010), the study develops a production theory model demonstrating how information asymmetries, collateral scarcity, and credit rationing force smaller firms to operate below minimum efficient scale, where the marginal product of capital exceeds its user cost, generating persistent underinvestment and performance disadvantages. The empirical analysis applies a Least Squares Dummy Variable (LSDV) approach to a balanced panel from the Federal Reserve Small Business Credit Survey spanning 2016 to 2024, across five firm size categories and nine survey years. Three sequential regressions test whether firm size affects financing constraints, credit market participation, and firm performance respectively. The results consistently support the theoretical predictions: firms with 20–49 employees face financial challenges 7.1 percentage points lower than micro-firms (1–4 employees), and the 50–499 employee category applies for loans at a rate 12.5 percentage points higher, independent of financial stress levels. Larger firm size is associated with revenue growth, profitability, and employment growth advantages of 16.4, 26.4, and 27.4 percentage points respectively over the reference group. Post-pandemic financial conditions deteriorated substantially across all categories, with financial challenge rates reaching 40.8 percentage points above the 2016 baseline by 2024, but the structural size gradient persisted throughout. The interaction model provides suggestive evidence that the revenue sensitivity to financial stress is size-differentiated, ranging from −0.32 for the smallest firms to −0.12 for the largest. Industry-level robustness checks support outstanding debt as the most stable predictor of credit demand across both grouping dimensions. The findings trace the complete causal chain from credit market imperfections to firm performance outcomes, with implications for the design of demand-side credit interventions targeting the most financially excluded small business segments.

Advisor

Huiting, Tian

Department

Business Economics

Disciplines

Entrepreneurial and Small Business Operations

Publication Date

2026

Degree Granted

Bachelor of Arts

Document Type

Senior Independent Study Thesis

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© Copyright 2026 Tyrese John K. Andah