Abstract

In this study we investigate financing decisions among young for-profit social enterprises. We examine how expectations derived from traditional capital structure theory apply to the context of social enterprises. Pecking order theory is highly relevant to social enterprises as their dual purpose can be a source of confusion given that their products and services often do not fit into established funder categories. This theory is based on the idea that managers have more information than investors. Pecking order theory proposes that in an environment with asymmetric information firms raise capital first internally, because borrowing from outsiders with limited information is more costly. Only as firms’ internal funds are depleted, firms turn to debt markets and, finally, as a last resort to outside equity markets.

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