Do initial financial conditions determine the fate of start-up firms?

Using a survival analysis approach, this paper investigates the impact of initial financial conditions on the post-entry performance of firms. We examine whether initial financial conditions affect the duration of survival among start-up firms in Japan, distinguishing between failure and merger. We provide evidence that start-up firms that rely more on equity than debt financing are less likely to fail within a shorter period, but we find little evidence that initial equity size has a significant effect on the likelihood of failure. Moreover, we find the negative effect of equity financing on the likelihood of failure to be greater for start-up firms founded following the abolition of regulations governing a minimum paid-in capital requirement. Furthermore, the results reveal that start-up firms with larger initial equity are more likely to exit through merger. Overall, the findings suggest that initial capital structure is a critical determinant of exit route.