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
Date Written: January 14, 2002
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: Suggested Citation