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Outside Entrepreneurial Capital

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  • Andy Cosh
  • Douglas Cumming
  • Alan Hughes

Abstract

This paper investigates the internal versus external financing decisions among 1900 early stage privately held UK firms in 1996-1997. We study the factors that affect rejection rates in applications for outside finance among the different types of investors, taking into account the non-randomness in a firm’s decision to seek outside finance. The data support the traditional pecking order theory; firms with greater capital expenditures / profits are more likely to seek finance and apply for more external finance. The data further indicate growth oriented firms are much more likely to apply for external finance. There are some differences in the internal versus external financing of female and male founder CEO firms, but these differences are largely attributable to growth orientation. Firms in industries with a greater proportion of larger competitors are less likely to obtain all of their desired outside capital. The data also indicate banks are less likely to finance completely new startups, while venture capital funds are more likely to finance innovative and growth orientated firms. Overall, the data do not indicate the presence of a capital gap in entrepreneurial finance; rather, firms seeking capital are able to secure their requisite financing from at least one of the many different available sources. Classification-JEL: G21, G22, G23, G24, G31, G32, G35

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Bibliographic Info

Paper provided by ESRC Centre for Business Research in its series ESRC Centre for Business Research - Working Papers with number wp301.

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Date of creation: Mar 2005
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Handle: RePEc:cbr:cbrwps:wp301

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Keywords: Entrepreneurial Finance; Capital Gaps; Pecking Order; Adverse Selection; Gender;

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Citations

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Cited by:
  1. Schwienbacher, Armin, 2013. "The entrepreneur's investor choice: The impact on later-stage firm development," Journal of Business Venturing, Elsevier, vol. 28(4), pages 528-545.
  2. Alicia M. Robb & David T. Robinson, 2010. "The Capital Structure Decisions of New Firms," NBER Working Papers 16272, National Bureau of Economic Research, Inc.
  3. Popov, Alexander & Roosenboom, Peter, 2013. "Venture capital and new business creation," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 4695-4710.
  4. Cumming, Douglas & Li, Dan, 2013. "Public policy, entrepreneurship, and venture capital in the United States," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 345-367.
  5. Schwienbacher, Armin, 2007. "A theoretical analysis of optimal financing strategies for different types of capital-constrained entrepreneurs," Journal of Business Venturing, Elsevier, vol. 22(6), pages 753-781, November.

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