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

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Author Info
Gavin C Reid

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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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Publisher 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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Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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Web page: http://www.st-and.ac.uk/%7Ewww_crieff/discpaps.html

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Find related papers by JEL classification:
D21 - Microeconomics - - Production and Organizations - - - Firm Behavior
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Reid, Gavin C., 1991. "Staying in business," International Journal of Industrial Organization, Elsevier, vol. 9(4), pages 545-556, December. [Downloadable!] (restricted)
  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. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July. [Downloadable!] (restricted)
  4. Oi, Walter Y, 1983. "Heterogeneous Firms and the Organization of Production," Economic Inquiry, Oxford University Press, vol. 21(2), pages 147-71, April.
  5. von Ungern-Sternberg, Thomas, 1990. "The Flexibility to Switch between Different Products," Economica, London School of Economics and Political Science, vol. 57(227), pages 355-69, August. [Downloadable!] (restricted)
  6. Gavin C Reid & Lowell R Jacobsen., . "The Small Entrepreneurial Firm," Hume Papers 8, David Hume Institute.
  7. Storey, D J, 1994. " New Firm Growth and Bank Financing," Small Business Economics, Springer, vol. 6(2), pages 139-50, April.
  8. 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.
  9. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  10. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May. [Downloadable!] (restricted)
  11. Charles Brown & James L. Medoff, 1989. "The Employer Size-Wage Effect," NBER Working Papers 2870, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  12. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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. [Downloadable!]
    Other versions:
  2. 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. [Downloadable!]
  3. Gavin C. Reid & Zhibin Xu, 2009. "Entrepreneurial Orientation, Intangible Assets and Firm Growth: the impact of ‘Spirit and Material’ on the growth of Chinese private firms," CRIEFF Discussion Papers 0907, Centre for Research into Industry, Enterprise, Finance and the Firm. [Downloadable!]
  4. 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. [Downloadable!]
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