Outside or inside the firm? The impact of debt financing on the exit routes of start-up firms

This study explores the impact of initial debt financing on the survival of start-up firms by identifying three types of exit routes: bankruptcy, voluntary liquidation, and merger. Using a discrete-time duration model for Japanese start-up firms, we examine how debt financing affects the time from founding to exit. We find that firms that initially rely on debt financing from outside creditors are more likely to go bankrupt and that long-term debt, rather than short-term debt, is significantly associated with the time to exit due to bankruptcy. In contrast, such firms are less likely to liquidate voluntarily, and a lower long-term debt ratio is associated with a shorter time to voluntary liquidation. Moreover, they are less likely to exit via merger, and a lower long-term debt ratio is associated with a shorter time to exit via merger. Furthermore, the likelihood of bankruptcy, unlike voluntary liquidation and merger, is influenced by macroeconomic conditions.