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Equity-based Financial Slack and New Venture Performance: Evidence from matched single-founder ventures

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  • Morgan, Horatio M.
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    Abstract

    This paper examines whether equity-based financial slack in the form of relatively high levels of founding equity will systematically hurt new venture performance. Drawing on data on 445 single-founder new ventures over the period 2004-2007, it uses the propensity score matching method to estimate the average effect of equity-based financial slack on new venture performance. It finds a negative and statistically significant average effect. This implies that single-founder new ventures that started out with relatively high levels of founding equity subsequently had a relatively low rate of profitability on average. The underlying mechanisms behind this empirical finding are explored, and the implications for the development of existing theory and practice are discussed.

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    File URL: http://mpra.ub.uni-muenchen.de/50291/
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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50291.

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    Date of creation: 28 Sep 2013
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    Handle: RePEc:pra:mprapa:50291

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    Keywords: Financial slack; Founding equity; New venture; Propensity score matching.;

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    1. Fairlie, Robert W. & Robb, Alicia, 2004. "Why Are Black-Owned Businesses Less Successful than White-Owned Businesses? The Role of Families, Inheritances, and Business Human Capital," IZA Discussion Papers 1292, Institute for the Study of Labor (IZA).
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    7. Bates, Timothy, 1995. "Self-employment entry across industry groups," Journal of Business Venturing, Elsevier, vol. 10(2), pages 143-156, March.
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    12. Grace Kim, 2006. "Do Equally Owned Small Businesses Have Equal Access to Credit?," Small Business Economics, Springer, vol. 27(4), pages 369-386, December.
    13. Blanchard, Lloyd & Zhao, Bo & Yinger, John, 2008. "Do lenders discriminate against minority and woman entrepreneurs?," Journal of Urban Economics, Elsevier, vol. 63(2), pages 467-497, March.
    14. Heckman, James J & Ichimura, Hidehiko & Todd, Petra, 1998. "Matching as an Econometric Evaluation Estimator," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 261-94, April.
    15. Acs, Zoltan J & Audretsch, David B, 1989. "Small-Firm Entry in U.S. Manufacturing," Economica, London School of Economics and Political Science, vol. 56(222), pages 255-65, May.
    16. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-35, June.
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