The Determinants of Financial Structure: New Insights from Business Start-Ups

K.U. Leuven, Department of Applied Economics, Working Paper No. 0203

46 Pages Posted: 16 Jan 2002

See all articles by Linda M. Van De Gucht

Linda M. Van De Gucht

KU Leuven - Department of Applied Economics

Nancy Huyghebaert

KU Leuven - Department of Accountancy, Finance and Insurance

Multiple version iconThere are 2 versions of this paper

Date Written: January 14, 2002

Abstract

Business start-ups lack prior history and reputation, face high default risk, and have highly concentrated ownership. These unique characteristics result in information and incentive problems, which, combined with entrepreneurial control benefits, affect initial financing decisions. This paper simultaneously examines their impact on leverage, debt mix and maturity. Unlike established firms, start-ups contract less bank debt when adverse selection and moral hazard problems are potentially high. Leasing and trade credit are used to compensate the lower bank debt. Entrepreneurs with large private benefits of control limit bank financing and increase its maturity to lower the default probability on their bank debt.

Keywords: capital structure, start-ups, information and incentive problems, private benefits of control

JEL Classification: C31, G21, G32

Suggested Citation

Van De Gucht, Linda M. and Huyghebaert, Nancy, The Determinants of Financial Structure: New Insights from Business Start-Ups (January 14, 2002). K.U. Leuven, Department of Applied Economics, Working Paper No. 0203, Available at SSRN: https://ssrn.com/abstract=296841 or http://dx.doi.org/10.2139/ssrn.296841

Linda M. Van De Gucht

KU Leuven - Department of Applied Economics ( email )

Naamsestraat 69
B-3000 Leuven
BELGIUM

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)

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