SMALL BUSINESS INVESTMENT COMPANIES - FINANCIAL CHARACTERISTICS AND INVESTMENTS

Small business investment companies (SBICs) provide long-term financin g to companies whose prospects and profits are difficult to evaluate a nd monitor by other investors. Banking organizations, which play a maj or 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 S BICs. The results show that the types of activities and industries fin anced by debt and equity investments are consistent with theories of a symmetric information and agency costs of external financing. In addit ion, 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 s ubsidies are not required to enable investments in small businesses to be profitable in the long run.