Abstract

To fulfill their growth aspirations, entrepreneurial ventures depend on short-term, liquid sources of debt financing such as bank loans. However, because of information asymmetry, in lending money to firms banks must deal with the possibility of adverse selection. As such, banks rely on well-established third-party credit scores such as the Dun and Bradstreet’s (D&B) Paydex score, which is a measure of the venture’s creditworthiness based on its ability to pay bills, to decide whether to lend credit. Using conceptual arguments grounded in venture financing literature and signaling theory, we develop a theoretical model of factors likely to influence the Paydex score. Further, we incorporate in the model multi-level features, by considering co-variates operating at firm and industry levels. Ours is probably the first study to examine creditworthiness of entrepreneurial firms based on prior track-record of external financing received and volatilities associated with firm sales and employee strength.

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