When finance meets entrepreneurial behaviour: explaining young firms’ survival and growth

This paper investigates how the interaction between financial structure and market strategy influences the survival and growth trajectories of young firms. We develop a theoretical model grounded in industrial organization showing that debt, through the limited liability mechanism, induces more aggressive market strategies and also increases the risk of failure. The model's predictions are then tested using longitudinal data from the French SINE survey. While debt alone increases the risk of exit, a non-monotonic relationship exists regarding strategy: the highest proportion of aggressive firms is found among those with medium debt intensity. In this group, entrepreneurial behaviour (proactiveness and competitive aggressiveness) has a positive and significant effect on firm survival and, among surviving firms, increases the probability of belonging to the high-growth category. Entrepreneurial behaviour benefits only materialize when firms operate with a balanced financial structure combining debt and equity. High leverage increases the risk of failure, which cancels out the benefits of an aggressive market strategy. One possible explanation is that firms benefiting from a diversified range of financing sources (debt and equity) face fewer constraints in securing inputs. Improved bargaining power vis-à-vis suppliers may also enable them to better manage uncertainty in production costs.