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Pecking order and debt capacity considerations for high-growth companies eking financing
This paper examines incremental financing decisions within high-growth business. A large longitudinal datat, free of survivorship bias, to cover financing events of high-growth business for up to 8 years is analyzed. The empirical evidence shows that profitable business prefer to finance investments with retained earnings, even if they have unud debt capacity. External equity is particularly important for unprofitable business with high debt levels, limited cash flows, high risk of failure or significant investments in intangible asts. The卧室挂画 findings are consistent with the extended pecking order theory controlling for constraints impod by debt capacity. It suggests that new equity issues are particularly important to allow high-growth business to grow beyond their debt capacity.
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Although few in number, high-growth business contribute disproportionately to employment and wealth creation in an economy(Storey 1994).This makes organizational growth a central area of rearch in entrepreneurship and a major policy concern. Proper financial management, including raising suitable financing, is one of the key factors shaping high-growth companies (Nicholls-Nixon 2005).The purpo of this paper is to offer an insight into the discrete financing decisions taken within high-growth business. Information asymmetries are thought to be particularly vere in this tting (Frank and Goyal 2003), causing a substantial wedge between the costs of internal and external (debt and equity) financing (Carpenter and Petern 2002a).We therefore focus on the pecking order theory to explain the financing choices of high-growth companies. The pecking order theory predicts the existence of a financing hierarchy, where business managers avoid the cost of external financing if possible. As a result, they will first prefer to u internal funds, then debt and finally outside equity as a last resort to finance investments (Myers 1984; Myers and Majluf 1984).
The impact of company characteristics on financial decision-making may vary according t
o the rearch tting (Harris and Raviv 1991).It is therefore important to test financial theories in ttings where our knowledge is limited to determine the generalizability of the theories across different ttings (Cassar 2004).Although high-growth companies are subject to the same market forces as any other company, studying the financing decisions of high-growth companies is germane for a number of 穹顶之下电影reasons. First, a recent stream in the finance and growth literature discuss the importance of external equity from private equity investors, like venture capitalists and business angels in the financing of high-growth , Baum and Silverman 2004;Davila et al.2003).Converly, it is assumed that bank debt is an unsuitable source of financing, especially for innovative entrepreneurial companies (e.g., Audretsch and Lehmann 2002;Carpenter and Petern 2002b;Gompers and Lerner 2001).Most studies in entrepreneurial finance have therefore 孕早期小腹痛focud on private equity financing, ignoring other potentially important sources of financing such as retained earnings and debt financing(Eckhardt et al.2006).In contrast to most contributions on the financing of high-growth companies, we do not limit ourlves to external equity financing, but empirically consider a diver range of financing choices,
covering internally generated funds, bank financing and new equity. Second, some small business managers may never consider the u of outside debt or equity financing (Howorth 2001).Most high-growth companies, however, 中九之家have considerable outside financing needs. Internal finance is often insufficient to finance high growth (Michaelas et al.1999;Gompers 1995).Hence, we may expect financial decision-makers in high-growth business to at least consider a broader range of financing alternatives compared to tho in ’’Mom and Pop ’’business .
By studying incremental financing decisions, our rearch address a number of drawbacks of previous rearch focusing on capital structure. First, 毛茛花traditional capital structure rearch does not distinguish between internal financing and external equity financing. However, this distinction may be particularly important in our tting characterized by high informational asymmetry (de Haan and Hinloopen2003).For example, an informationally opaque 远安一高company with sufficient internal funds should be more likely to finance investments internally and hence should be less likely to attract additional external equity finance. Second, a company’s capital structure is the aggregate
of its past financing decisions. Therefore, capital structure rearch generally masks information on the timing of the financing acquired. The characteristics of a business change as it grows, which affects the availability and suitability of different financing options(Berger and Udell 1998;Gompers 1995).For example, as a company grows it may invest more in tangible asts, which can rve as collateral and make more and heaper bank financing available. It can also become more profitable, making internally generated funds available. It is therefore important to take into account the dynamic nature of company characterisics and financing choices. Further, while most studies rearch financing choices of quoted companies (Fama and French 2005; Frank and Goyal 2003; de Haan and Hinloopen 2003; Shyam-Sunder and Myers 1999; Helwege and Liang 1996),we focus on financing choices of predominantly unquoted companies. Quoted companies have, however, more financing options due to lower information asymmetries (Berger and Udell 1998; Harris and Raviv 1991).This may lead to different financing strategies for quoted and unquoted companies.
From a methodological perspective, the lack of longitudinal studies in entrepreneurship re
arch has been described as a major weakness (Davidsson and Wiklund 1999).Our study analys the incremental紫罗兰的花语 financing decisions of companies over a period of up to 8 years, during which all companies in our sample have grown extensively. We include start-ups, failed and merged companies, if they have grown considerably after start-up or before disappearing as independent entities. This implies that our study does not suffer from survivorship bias.
In perfect financial markets, business will always find sufficient and suitable financing for value-creating investments (Modigliani and Miller 1958).Hence, financing decisions are irrelevant, and internal finance and external debt and equity financing are perfect substitutes. Real-world financial markets, however, are not perfect, and market imperfections cau financing decisions to matter for business development and firm value. Unsuitable financing decisions may have rious conquences, such as limited potential for future business expansion(Nicholls-Nixon 2005),financial distress(Carpenter and Petern 2002b)or even business failure (Michaelas et al.1999).
