Abstract

Financial capital is one of the fundamental resources needed to start and operate a firm (Cooper, Gimeno- Gascon, Woo, 1994), and is a main factor in the performance of new firms (e.g. Cressy, 2006; Parker & Van Praag, 2006). Many founders have to look externally for financial capital as they are personally constrained financially when trying to start and operate their firms due to a lack of personal wealth (e.g. Evans & Jovanovic, 1989). Debt and equity are two of the main forms of external financing that founders consider sing to finance the new firm’s operations. These two forms of financing are readily used by a number of firms as they grow and mature (Berger and Udell, 1998). These financing options offer different benefits to new firms that could affect their performance, with prior studies finding that the amount of equity and the amount of debt used by the firm positively affects new firm performance (e.g. Astebro & Bernhardt, 2003; Cooper et al, 1994; Vanacker & Manigart, 2006).

Past research suggests obtaining any type of financing, as long as it is enough to fund the business, is the best way to improve new firm performance. However, some entrepreneurs prefer debt (e.g. De Meza and Southey, 1996; Hackbarth, 2004; Landier & Thesmar, 2009), while other entrepreneurs either desire to obtain equity financing to improve cash flow during the early years or have to obtain equity financing due to market constraints (e.g. Stiglitz & Weiss, 1981; Vanacker & Manigart, 2006; Parker, 2009). Thus, this study addresses the research question: Does the form of financing (debt or equity) used in the first year affect later performance of the firm?

Share

COinS