The Demand for Debt Finance by Entrepreneurial Firms

EFA 2001 Barcelona Meetings; K.U. Leuven, Department of Applied Economics Working Paper No. 0110

69 Pages Posted: 21 Mar 2001

See all articles by Nancy Huyghebaert

Nancy Huyghebaert

KU Leuven - Department of Accountancy, Finance and Insurance

Cynthia Van Hulle

KU Leuven - Department of Applied Economics

Linda M. Van De Gucht

KU Leuven - Department of Applied Economics

Date Written: February 2001

Abstract

We model the entrepreneurial firm's choice of debt finance, allowing for debt renegotiations in the event of financial distress. We differentiate two sources of debt finance, bank debt and trade credit, by the implicit equity stake that lenders hold in the borrowing firm. Lenders with a large implicit equity stake, such as suppliers, adopt a more lenient liquidation policy when firms have a relatively high liquidation value, but set a higher price for their credit. Entrepreneurs, who have private information about their probability of financial distress, borrow exclusively from lenders with a small implicit equity stake, such as banks, only when the price advantage of bank debt outweighs the cost of a stricter enforcement of liquidation rights. Entrepreneurs who prefer the lenient liquidation policy adopted by suppliers contract only partial bank finance in order to avoid a potential default against the bank. Using data on a sample of 152 true business start-ups in the manufacturing sector, we provide empirical evidence that supports this theoretical model.

JEL Classification: C70, G32, G33

Suggested Citation

Huyghebaert, Nancy and Van Hulle, Cynthia and Van De Gucht, Linda M., The Demand for Debt Finance by Entrepreneurial Firms (February 2001). EFA 2001 Barcelona Meetings; K.U. Leuven, Department of Applied Economics Working Paper No. 0110, Available at SSRN: https://ssrn.com/abstract=261651 or http://dx.doi.org/10.2139/ssrn.261651

Nancy Huyghebaert (Contact Author)

KU Leuven - Department of Accountancy, Finance and Insurance ( email )

Naamsestraat 69
B-3000 Leuven, 3000
Belgium
00 32 16326737 (Phone)
00 32 16326683 (Fax)

HOME PAGE: http://www.econ.kuleuven.be/eng/fetew/medewerker/Userpage.aspx?PID=524

Cynthia Van Hulle

KU Leuven - Department of Applied Economics ( email )

Naamsestraat 69
B-3000 Leuven
BELGIUM
32-16-326734 (Phone)
32-16-326732 (Fax)

Linda M. Van De Gucht

KU Leuven - Department of Applied Economics ( email )

Naamsestraat 69
B-3000 Leuven
BELGIUM

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