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The Determinants of Debt and (Private-) Equity Financing in Young Innovative SMEs: Evidence from Germany

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  • Dorothea Schäfer
  • Axel Werwatz
  • Volker Zimmermann

Abstract

Financial theory creates a puzzle. Some authors argue that high-risk entrepreneurs choose debt contracts instead of equity contracts since risky but high returns are of relatively more value for a loan-financed firm. On the contrary, authors who focus explicitly on start-up finance predict that entrepreneurs are the more likely to seek equity-like venture capital contracts, the more risky their projects are. Our paper makes a first step to resolve this puzzle empirically. We present microeconometric evidence on the determinants of debt and equity financing in young and innovative SMEs. We pay special attention to the role of risk for the choice of the financing method. Since risk is not directly observable we use different indicators for financial and project risk. It turns out that our data generally confirms the hypothesis that the probability that a young high-tech firm receives equity financing is an increasing function of the financial risk. With regard to the intrinsic project risk, our results are less conclusive, as some of our indicators of a risky project are found to have a negative effect on the likelihood to be financed by private equity.

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Bibliographic Info

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 411.

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Length: 31 p.
Date of creation: 2004
Date of revision:
Handle: RePEc:diw:diwwpp:dp411

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Keywords: Debt and equity financing; Financial risk und project risk; Venture capital and bank financing;

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References

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Cited by:
  1. Mueller, Elisabeth & Zimmermann, Volker, 2006. "The Importance of Equity Finance for R&D Activity: Are There Differences Between Young and OldCompanies?," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 06-14, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  2. Stephen Pavelin & Lynda Porter, 2008. "The Corporate Social Performance Content of Innovation in the U.K," Journal of Business Ethics, Springer, Springer, vol. 80(4), pages 711-725, July.
  3. Müller, Elisabeth & Zimmermann, Volker, 2006. "The Importance of Equity Finance for R&D Activity – Are There Differences Between Young and Old Companies?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 111, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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