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Financing the Small Firm Start-Up: Determinants of Debt Use

Author Info

  • Frederick C. Scherr

    (West Virginia University)

  • Timothy F. Sugrue

    (George Mason University)

  • Janice B. Ward

    (West Virginia University)

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    Abstract

    While academic research concerning capital structure of large corporations has been abundant in the finance literature, studies of small firms have been somewhat less common, and investigation of capital structure at origin (start-up) has been virtually nil. In this paper we present empirical evidence concerning the start-up capital structures of small firms. We base this investigation upon characteristics of both owner and firm. We find the percent of the owner's income expected to be derived from the business to be positively associated with debt use and the owner's age to be negatively associated with debt use. We find that more debt is obtained if the business owner is married and less if he or she is black. Similarly, more debt is prevalent among start-up firms in transportation and utilities than those in other industries. When debt obtained from other than financial institutions is considered, factors such as gender, experience, education, and expected firm size also play a role in the structure of start-up capital.

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    File URL: http://jefsite.org/RePEc/pep/journl/jef-1993-03-1-b-scherr.pdf
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    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Small Business Finance.

    Volume (Year): 3 (1993)
    Issue (Month): 1 (Fall)
    Pages: 17-36

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    Handle: RePEc:pep:journl:v:3:y:1993:i:1:p:17-36
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    Web page: http://bschool.pepperdine.edu/jef

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    Keywords: Financing ; Small Firm; Small Business; Startup; Debt; Lending;

    Find related papers by JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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    1. Sugrue, Timothy F & Scherr, Fredrick C, 1989. "An Empirical Test of Ross's Cash Flow Beta Theory of Capital Structur e," The Financial Review, Eastern Finance Association, vol. 24(3), pages 355-70, August.
    2. Jerry A. Hausman & Andrew W. Lo & A. Craig MacKinlay, 1991. "An Ordered Probit Analysis of Transaction Stock Prices," NBER Working Papers 3888, National Bureau of Economic Research, Inc.
    3. Gavin Chen & John Cole, 1988. "The myths, facts, and theories of ethnic, small-scale enterprise financing," The Review of Black Political Economy, Springer;National Economic Association, vol. 16(4), pages 111-123, March.
    4. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    5. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
    6. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1987. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
    7. Bates, Timothy, 1990. "Entrepreneur Human Capital Inputs and Small Business Longevity," The Review of Economics and Statistics, MIT Press, vol. 72(4), pages 551-59, November.
    8. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    9. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    10. Timothy Bates, 1989. "The changing nature of minority business: A comparative analysis of asian, nonminority, and black-owned businesses," The Review of Black Political Economy, Springer;National Economic Association, vol. 18(2), pages 25-42, September.
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    Cited by:

    1. Bianca Avram & Simona Sabou & Stelian Brad, 2016. "A Preliminary Investigation of Female Entrepreneurs’ Behavior in Romania," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 19(60), pages 3-14, June.
    2. Susan Coleman, 2002. "Small Firm Use of Debt: An Examination of the Smallest Small Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 7(1), pages 51-76, Spring.
    3. Alicia M. Robb & John D. Wolken, 2002. "Firm, owner, and financing characteristics: differences between female- and male-owned small businesses," Finance and Economics Discussion Series 2002-18, Board of Governors of the Federal Reserve System (U.S.).
    4. Alicia M. Robb, 2002. "Small Business Financing: Differences Between Young and Old Firms," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 7(2), pages 45-64, Summer.
    5. Susan Coleman, 2002. "Borrowing Patterns for Small Firms: A Comparison by Race and Ethnicity," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 7(3), pages 77-98, Fall.
    6. Eduardo Couto & José Bilau, 2011. "Initial Capital Structure Of Portuguese Innovative Firms:The Role Of Nascent Entrepreneurs' Human Capital," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(1), pages 29-42.
    7. Kenji Kutsuna & Yuji Honjo, 2005. "External Equity at Start-up and Post-entry Performance: Evidence from Japan," Discussion Papers 2005-46, Kobe University, Graduate School of Business Administration.
    8. Wei He & H. Kent Baker, 2007. "Small Business Financing: Survey Evidence in West Texas," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 12(1), pages 27-54, Spring.
    9. Mirjam van Praag & Gerrit de Wit & Niels Bosma, 2003. "Initial Capital Constraints hinder Entrepreneurial Venture Performance," Tinbergen Institute Discussion Papers 03-047/3, Tinbergen Institute, revised 19 Nov 2004.
    10. Kenji Kutsuna & Yuji Honjo, 2006. "Start-up Financing Choice and Post-entry Performance," Discussion Papers 2006-33, Kobe University, Graduate School of Business Administration.
    11. Arturo Haro-de-Rosario & María del Carmen Caba-Pérez & Leonardo Cazorla-Papis, 2016. "The impact of venture capital on investee companies: evidence from Spain," Review of Managerial Science, Springer, vol. 10(3), pages 577-600, July.
    12. Susan Coleman, 2004. "The "Liability of Newness" and Small Firm Access to Debt Capital: Is There a Link?," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 9(2), pages 37-60, Summer.

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