The financial life cycle of European SMEs before, during and after crisis periods. What is the role of a country's financial system?

This paper contributes to the financial life cycle literature by studying the effect of firm age on SMEs' debt policies, focusing for the first time on a multi-country context comprising 28 European countries. It also examines, in a novel way, whether this effect is influenced by periods of economic crisis, and in particular whether the global financial crisis and the European sovereign debt crisis shape SMEs' financial life cycles in comparison to pre- and post-crisis periods. Our pre-crisis findings show a high use of debt in the early stages of SMEs' life cycles, decreasing over time. During the crises we observe that the negative age/debt relationship becomes weaker and non-statistically significant compared to pre-crisis periods. After the crises we observe a gradual return to the pre-crisis pattern, to a lower extent for younger and more informationally opaque SMEs. Most notably, we interestingly find that the pre-, during and post-crisis patterns strongly differ according to level of financial development of the country in which a SME operates. Before and after crises, SMEs in more financially developed countries show a stronger tendency to reduce debt as they age thanks to better access to capital and lower information asymmetries. However, during crises this moderating effect disappears, revealing how even healthy financial systems can become ineffective under extreme stress. Our work highlights the significant role of banks and bank lending during difficult periods, suggesting that robust financial institutions play a key role in absorbing economic shocks and supporting SMEs' financial trajectories.