Are SMEs in the hospitality industry less likely to experience credit constraint than other industries in the service sector? Evidence from Latin America

Abstract

Small- and medium-sized enterprises (SMEs) in the service and hospitality industries are critical for economic development in Latin America. However, due to information asymmetries, access to capital is a major obstacle for SMEs to expand their activities. Drawing from agency theory, the purpose of this study was to examine the financial constraints of SMEs in the service sector, particularly the case of hospitality firms in Latin America, due to requirements associated with mitigating information asymmetries. Using a logit model, we investigated whether financial requirements acting as mechanisms to mitigate information asymmetries, such as fixed asset collateral requirements and financial statement audits, would be associated with credit constraints for small- and medium-sized firms. We further investigated whether, due to their unique financing characteristics, SMEs in the hospitality industry would be less credit constrained than other industries in the service sector. Results suggest that SMEs subjected to collateralized fixed assets and auditing requirements, separately, were more likely to be credit constrained. However, our findings indicate that both financial requirements, when used together, decreased the likelihood of credit constraint for SMEs in the hospitality industry.