Abstract

The decisions on funding a new venture provides the entrepreneur with choices related to the composition of the firm’s capital structure. Obtaining adequate, timely and appropriate financing is a challenge faced by any new firm, and is a major hurdle that needs to be effectively navigated by the entrepreneur or the owner of the new venture. Apart from the legitimacy concerns faced by all new ventures in obtaining external funding, there are additional challenges in capital intensive sectors. Specifically, new ventures tend to suffer from information asymmetry and are therefore more likely to tread the path of least resistance in raising capital funding. Despite prior research on start up financing, several gaps exist in our understanding of the firm-financing interface. Specifically, we are relatively uninformed about financing needs and challenges of new firms in capital intensive industries and their effects on performance. We explore the firm-financing interface, to understand the effects of capital structure decisions on new venture performance. The primary logic is derived from the well known Capital Structure Theory (Modigliani and Miller theorem) and one variant, i.e., the Pecking Order Theory popularized by Myers (1984).

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