Share This Article:

The Capital Structure of Business Start-Up: Is There a Pecking Order Theory or a Reversed Pecking Order? —Evidence from the Panel Study of Entrepreneurial Dynamics

Abstract Full-Text HTML Download Download as PDF (Size:184KB) PP. 244-254
DOI: 10.4236/ti.2013.44029    5,967 Downloads   9,784 Views   Citations

ABSTRACT

Using the Panel Study of Entrepreneurial Dynamics, we study if the problems of asymmetry and opacity of information, asset specificity, agency problem and signaling theory predict the financial structure at inception. Thus, we conduct a study in two steps. First, by analyzing the descriptive statistics, we find that novice entrepreneurs turn first to internal sources of finance. Then, they apply to external debts and finally to equity finance. We prove then the applicability of the Pecking order theory in case of entrepreneurial firms. Second, by analyzing the role of financial theory in predicting the capital structure of entrepreneurial firms we find the following results. In fact, evidence from analyzing the role of information opacity, asset specificity and signaling theory, proves that the main source of finance is equity rather than debt. In the majority of the cases, depth interviews show from studying the financial theory an inverted pecking order. Two main reasons for this pattern can be established. First, entrepreneurs consider debt as a personal liability as it requires to be underwritten by personal guarantees. Entrepreneurs place a self-imposed limit on the extent to which they are prepared to mortgage their assets. Second, entrepreneurs deliberately seek out equity investment as a means of obtaining added value. This external equity which has been viewed as expensive is viewed as good value. A well chosen investor can add business skills and social capital in the form of commercial contacts and access to relevant networks.

Conflicts of Interest

The authors declare no conflicts of interest.

Cite this paper

H. Fourati and H. Affes, "The Capital Structure of Business Start-Up: Is There a Pecking Order Theory or a Reversed Pecking Order? —Evidence from the Panel Study of Entrepreneurial Dynamics," Technology and Investment, Vol. 4 No. 4, 2013, pp. 244-254. doi: 10.4236/ti.2013.44029.

References

[1] C. Mac an Bhaird, “The Modigliani-Miller Proposition after Fifty Years and Its Relation to Entrepreneurial Finance,” Strategic Change, Vol. 19, No. 1-2, 2010, pp. 928.
http://dx.doi.org/10.1002/jsc.855
[2] S. C. Myers and N. Majluf, “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have,” Journal of Financial Economics, Vol. 13, No. 2, 1984, pp. 187-221.
http://dx.doi.org/10.1016/0304-405X(84)90023-0
[3] R. Cressy, “Why Do Most Firms Die Young?” Small Business Economics, Vol. 26, No. 2, 2006, pp. 103-116.
http://dx.doi.org/10.1007/s11187-004-7813-9
[4] P. Poutziouris and F. Chittenden and N. Michaelas, “The Financial Development of Smaller Private and Public (SMEs),” Working Paper 378, Manchester Business School, Manchester, 1999.
[5] P. Sanyal and L. M. Catherine, “The Financial Structure of Startup Firms: The Role of Assets, Information, and Entrepreneur Characteristics,” Federal Reserve Bank of Boston, Working Paper 10-17, 2010.
[6] J. Rédis, “Finance Entrepreneuriale le Créateur d’Entreprise et les Investisseurs en Capital,” Préface de Hughes Franc, Edition de Boek, 2009.
[7] S. Paul and G. Whittam and J. B. Johnston, “The Operation of the Informal Venture Capital Market in Scotland,” Venture Capital, Vol. 5, No. 4, 2003, pp. 313-335.
http://dx.doi.org/10.1080/1369106032000141931
[8] L. Cassia and T. Minola, “Pecking Order Theory Extesion and the Role of Human Capital in New Technology Based Firms. Evidence from the Kauffman Firm Survey,” Paper Presented at the European Institute for Advanced Studies in Management (EIASM) RENT XXIV—Research in Entrepreneurship and Small Business, Maastricht, 1819 November 2010.
[9] A. Newan and S. Gunessee and B. Hilton, “Applicability of Financial Theories of Capital Structure to the Chinese Cultural Context: A Study of Private Owned SMEs’,” International Small Business Journal, Vol. 27, 2012, pp. 470-495.
[10] M. Garmaise, “Informed Investors and the Financing of Entrepreneurial Projects,” University of Chicago, Working Paper, 2001.
[11] G. Cassar, “The Financing of Business Start-Up,” Journal of Business Venturing, Vol. 19, No. 2, 2004, pp. 261-283.
http://dx.doi.org/10.1016/S0883-9026(03)00029-6
[12] A. Hanley and J. Crook, “The Role of Private Knowledge in Reducing the Information Wedge: A Research Note,” Journal of Business Finance & Accounting, Vol. 32, No. 1-2, 2005, pp. 415-433.
http://dx.doi.org/10.1111/j.0306-686X.2005.00599.x
[13] M. Campello and R. J. Graham and R. C. Harvey, “The Real Effects of Financial Constraints: Evidence from a Financial Crisis,” Journal of Financial Economics, Vol. 97, No. 3, 2008, pp. 470-487.
[14] A. Atherton, “Rational Actors, Knowledgeable Agents: Extending Pecking Order Considerations of New Venture Financing to Incorporate Founder Experience, Knowledge and Networks,” International Small Business Journal, Vol. 27, No. 4, 2009, pp. 470-495.
http://dx.doi.org/10.1177/0266242609334969
[15] L. Sau, “New Pecking Order Financing for Innovative Firms: An Overwiew,” Working Paper, Department of Economics, Università di Torino, 2007.
[16] A. Paulson and R. Townsend, “Entrepreneurship and Financial Constraints in Thailand,” Journal of Corporate Finance, Vol. 10, No. 2, 2004, pp. 229-262.
http://dx.doi.org/10.1016/S0929-1199(03)00056-7
[17] A. D. Cosh and A. Hughes, “Size, Financial Structure and Profitability: UK Companies in the 1980S’,” In: A. Hughes and D. Storey, Eds., Finance and the Small Firm, Routledge, London, 1994.
[18] N. Huyghebaert and L. M. Van de Gucht, “The Determinants of Financial Structure: New Insights from Business Start-Ups,” European Financial Management, Vol. 13, No. 1, 2007, pp. 101-133.
http://dx.doi.org/10.1111/j.1468-036X.2006.00287.x
[19] A. N. Berger and G. F. Udell, “Small Business and Debt Finance,” International Handbook Series on Entrepreneurship, Vol. 1, 1998, pp. 299-328.
[20] M. Cherif, “Asymétrie d’Information et Financement des PME Innovantes par le Capital Risque,” Revue d’Economie Financière, Vol. 54, No. 54, 1999, pp. 163-178.
[21] T. Baas and M. Schrooten, “Relationship Banking and SMEs: A Theoretical Analysis,” Small Business Economics, Vol. 27, No. 2-3, 2006, pp. 127-137.
http://dx.doi.org/10.1007/s11187-006-0018-7
[22] M. Falconer, G. Reid and N. Terry, “Post Investment Demand for Accounting Information by Venture Capitalist,” Managerial Finance, Vol. 20, 1994, pp. 186-196.
[23] S. Parker, “The Economics of Entrepreneurship: What We Know and What We Don’t Know,” Foundations and Trends, in Entrepreneurship, Vol. 1, No. 1, 2005, pp. 154.
http://dx.doi.org/10.1561/0300000001
[24] O. E. Williamson, “Corporate Finance and Corporate Governance,” Journal of Finance, Vol. 43, No. 3, 1988, pp. 567-591.
http://dx.doi.org/10.1111/j.1540-6261.1988.tb04592.x
[25] R. D. Ireland and M. A. Hitt and D. G. Sirmon, “A Model of Strategic Entrepreneurship: The Construct and Its Dimensions,” Journal of Management, Vol. 29, No. 6, 2003, pp. 963-989.
[26] D. B. Audretsch and E. E. Lehmann and L. A. Plummer, “Agency and Governance in Strategic Entrepreneurship,” Entrepreneurship Theory and Practice, Vol. 33, No. 1, 2009, pp. 150-166.
[27] J. Jacquin, “Les Jeunes Entreprises Innovantes: Une Priorité pour la Croissance,” Rapport du Commissariat Général au Plan, La Documentation Francaise, 2003.
[28] O. Hart and J. A. Moore, “A Theory of Debt Based on the Inalienability of Human Capital,” The Quarterly Journal of Economics, Vol. 109, No. 4, 1995, pp. 841-879.
http://dx.doi.org/10.2307/2118350
[29] H. Leland and D. Pyle, “Informational Asymmetries, Financial Structure, and Financial Intermediation,” The Journal of Finance, Vol. 32, No. 2, 1977, pp. 371-387.
http://dx.doi.org/10.2307/2326770
[30] A. W. Boot and A. V. Thakor and G. F. Udell, “Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications and Empirical Results,” Economic Journal, Vol. 101, No. 406, 1991, pp. 458-472.
[31] B. F. Blumberg and W. A. Letterie, “Business Starters and Credit Rationing,” Small Business Economics, Vol. 30, No. 2, 2008, pp. 187-200.
http://dx.doi.org/10.1007/s11187-006-9030-1
[32] J. Black and D. De Meza and D. Jeffreys, “House Prices, the Supply of Collateral and the Enterprise Economy,” The Economic Journal, Vol. 106, No. 434, 1996, pp. 6075.
http://dx.doi.org/10.2307/2234931
[33] J. Bartholdy and C. Mateus, “Financing of SME’s: An Asset Side Story,” Société Universitaire Européenne de Recherches Financiéres, Palais du Luxembourg, Paris, 2008.
[34] D. J. Storey, “Understanding the Small Business Sector,” Routledge, New York, 1994.
[35] G. Gorton and J. Kahn, “The Design of Bank Loan Contracts,” The Review of Financial Studies, Vol. 13, No. 2, 2000, pp. 331-364. http://dx.doi.org/10.1093/rfs/13.2.331
[36] S. Coleman and R. Cohn, “Small Firms’ Use of Financial Leverage: Evidence from the 1993 National Survey of Small Business Finances,” Journal of Business and Entrepreneurship, Vol. 12, No. 3, 2000, pp. 87-103.
[37] R. Cressy, “Are Business Start-Ups Debt-Rationed?” Economic Journal, Royal Economic Society, Vol. 106, No. 438, 1996, pp. 1253-1270.
[38] P. Reynolds, “Informal and Early Formal Financial Support in the Business Creation Process: Exploration with PSED II Data Set,” Journal of Small Business Management, Vol. 49, No. 1, 2011, pp. 27-54.
http://dx.doi.org/10.1111/j.1540-627X.2010.00313.x
[39] G. Guidici and S. Paleari, “The Provision of Finance to Innovation: A Survey Conducted among Italian Technology-Based Small Firms,” Small Business Economics, Vol. 14, No. 1, 2000, pp. 37-53.
http://dx.doi.org/10.1023/A:1008187416389
[40] T. Bates, “Entrepreneur Human Capital Inputs and Small Business Longevity,” The Review of Economics and Statistics, Vol. 72, No. 4, 1990, pp. 551-559.
http://dx.doi.org/10.2307/2109594
[41] S. Paul and G. Whittam and J. Wyper, “The Pecking Order Hypothesis: Does It Apply to Start-Up Firms?” Journal of Small Business and Enterprise Development, Vol. 14, No. 1, 2007, pp. 8-21.
http://dx.doi.org/10.1108/14626000710727854
[42] H. Fourati and H. Affes, “Financial Constraints, Human and Social Capital, and Risk-Taking Attitude in the Foundation of New Firms,” Strategic Change: Briefings in Entrepreneurial Finance, Vol. 20, No. 5-6, 2011, pp. 219-232.

  
comments powered by Disqus

Copyright © 2019 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.