European listed firms in the smallest size group face a particularly wide implied cost-of-capital gap with U.S. peers, a working paper finds, highlighting a financing hurdle for companies seeking growth capital.
The August paper by Bo Becker, Efraim Benmelech and Joao Monteiro, published by the National Bureau of Economic Research (NBER), says smaller European firms do not appear to offset weaker equity financing, including venture capital, by borrowing more. The researchers estimate the implied rate by comparing listed companies’ market valuations with expected future earnings. It is a discount-rate measure, not the interest charged on a loan.
The paper covers public companies and does not establish whether privately held start-ups face the same cost gap. In a Nov. 12 post on his Klement on Investing newsletter, Joachim Klement speculated that the issue may also affect companies before they go public. In his reading of the research, the cost difference appeared to widen during the latter half of the 2010s, particularly among smaller firms.
Separate research by the Organisation for Economic Co-operation and Development (OECD) covers about 190,000 innovative start-ups. It finds that funding in the European Union (EU) and the United States is broadly comparable in earlier stages, with the gap emerging as firms approach scale. The OECD uses rising superstars to describe start-ups valued above $1 billion while private or at an initial public offering.
Among those start-ups, U.S. funding pulls ahead near scale, with a small number of very large deals accounting for much of the difference, the OECD report says. That study tracks funding amounts for start-ups; the NBER paper estimates implied capital costs for listed companies. The findings concern different stages and measures, rather than the same firms tracked over time.
The NBER paper also identifies product-market scaling barriers alongside financing disadvantages and compares the widening valuation gap between the United States and Europe from 2008 to 2023.
