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Capital Structure at Inception and the Short-Run Performance of Micro-Firms

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  • Gavin C Reid

Abstract

This paper examines the financial structure and performance of a sample of 150 young micro-firms. Their average age is one and a half years; and their average size is three full-time employees. Short-run performance is measured over one year, in terms of continuing to trade, and the evidence is analysed using a split sample comparison, and probit analysis. The general finding is that financial structure is not a major determinant of performance in this, the very earliest, phase of the life-cycle of the micro-firm. Whilst it is possible to identify specific financial features which may favour survival (e.g. the availability of trade credit) or may threaten survival (e.g. the use of extended purchase commitments), conventional features of financial structure (e.g. assets, gearing) do not play a significant role. However, other (non-financial) explanations of early-stage survival are available, invluding the use of advertising and business planning, and the avoidance of precipitate product innovation. This suggests that market features and internal organisation of the micro-firm may dominate financial structure as determinants of survival in the very earliest phase of the life-cycle.

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Bibliographic Info

Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9607.

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Date of creation: Oct 1996
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Handle: RePEc:san:crieff:9607

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References

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  1. Arulampalam, W. & Robin A. Naylor & Jeremy P. Smith, 2002. "University of Warwick," Royal Economic Society Annual Conference 2002 9, Royal Economic Society.
  2. Chittenden, Francis & Hall, Graham & Hutchinson, Patrick, 1996. " Small Firm Growth, Access to Capital Markets and Financial Structure: Review of Issues and an Empirical Investigation," Small Business Economics, Springer, vol. 8(1), pages 59-67, February.
  3. Gavin C Reid & Lowell R Jacobsen., . "The Small Entrepreneurial Firm," Hume Papers 8, David Hume Institute.
  4. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  5. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  6. Oi, Walter Y, 1983. "Heterogeneous Firms and the Organization of Production," Economic Inquiry, Western Economic Association International, vol. 21(2), pages 147-71, April.
  7. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-59, October.
  8. Thomas VON UNGERN-STERNBERG, 1988. "The Flexibility to Switch between Different Products," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 8806, Université de Lausanne, Faculté des HEC, DEEP.
  9. Reid, Gavin C., 1991. "Staying in business," International Journal of Industrial Organization, Elsevier, vol. 9(4), pages 545-556, December.
  10. van der Wijst, Nico & Thurik, Roy, 1993. " Determinants of Small Firm Debt Ratios: An Analysis of Retail Panel Data," Small Business Economics, Springer, vol. 5(1), pages 55-65, March.
  11. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
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Cited by:
  1. Gavin C Reid, 1997. "Small Firms' Actions and their Survival Probabilities," CRIEFF Discussion Papers 9721, Centre for Research into Industry, Enterprise, Finance and the Firm.
  2. Gavin C Reid & Julia A Smith, 1996. "What Makes a New Business Start-Up Successful?," CRIEFF Discussion Papers 9618, Centre for Research into Industry, Enterprise, Finance and the Firm.
  3. Gavin C Reid & Julia A Smith, 1999. "The Impact of Contingencies on Information System Development," CRIEFF Discussion Papers 9918, Centre for Research into Industry, Enterprise, Finance and the Firm.
  4. Soriano, Domingo Ribeiro, 2010. "Management factors affecting the performance of technology firms," Journal of Business Research, Elsevier, vol. 63(5), pages 463-470, May.
  5. Reid, Gavin C & Xu, Zhibin, 2009. "Entrepreneurial Orientation, Intangible Assets and Firm Growth: the impact of ‘Spirit and Material’ on the growth of Chinese private firms," SIRE Discussion Papers 2009-32, Scottish Institute for Research in Economics (SIRE).

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