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

Nancy Huyghebaert, Linda M. Van De Gucht
2002 Social Science Research Network  
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.
more » ... 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: C31, G21, G32
doi:10.2139/ssrn.296841 fatcat:ze75eey3j5etbglute5opvsxtu