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Equity-based Financial Slack and New Venture Performance: Evidence from matched single-founder ventures


  • Morgan, Horatio M.


This paper examines whether equity-based financial slack in the form of relatively high levels of founding equity will systematically hurt new venture performance. Drawing on data on 445 single-founder new ventures over the period 2004-2007, it uses the propensity score matching method to estimate the average effect of equity-based financial slack on new venture performance. It finds a negative and statistically significant average effect. This implies that single-founder new ventures that started out with relatively high levels of founding equity subsequently had a relatively low rate of profitability on average. The underlying mechanisms behind this empirical finding are explored, and the implications for the development of existing theory and practice are discussed.

Suggested Citation

  • Morgan, Horatio M., 2013. "Equity-based Financial Slack and New Venture Performance: Evidence from matched single-founder ventures," MPRA Paper 50325, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:50325

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    References listed on IDEAS

    1. Gordon E Greenley, 1998. "A Comparison of Slack Resources in High and Low Performing British Companies," Journal of Management Studies, Wiley Blackwell, vol. 35(3), pages 377-398, May.
    2. Acs,Zoltan J. & Armington,Catherine, 2011. "Entrepreneurship, Geography, and American Economic Growth," Cambridge Books, Cambridge University Press, number 9781107402539, March.
    3. Acs, Zoltan J. & Armington, Catherine, 2004. "The impact of geographic differences in human capital on service firm formation rates," Journal of Urban Economics, Elsevier, vol. 56(2), pages 244-278, September.
    4. Robert W. Fairlie & Alicia M. Robb, 2007. "Why Are Black-Owned Businesses Less Successful than White-Owned Businesses? The Role of Families, Inheritances, and Business Human Capital," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 289-323.
    5. Josep-Maria Arauzo-Carod & Agustí Segarra-Blasco, 2005. "The Determinants of Entry are not Independent of Start-up Size: Some Evidence from Spanish Manufacturing," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 27(2), pages 147-165, September.
    6. Acs, Zoltan J & Audretsch, David B, 1989. "Small-Firm Entry in U.S. Manufacturing," Economica, London School of Economics and Political Science, vol. 56(222), pages 255-265, May.
    7. Evans, David S & Leighton, Linda S, 1989. "Some Empirical Aspects of Entrepreneurship," American Economic Review, American Economic Association, vol. 79(3), pages 519-535, June.
    8. Bates, Timothy, 1995. "Self-employment entry across industry groups," Journal of Business Venturing, Elsevier, vol. 10(2), pages 143-156, March.
    9. Grace Kim, 2006. "Do Equally Owned Small Businesses Have Equal Access to Credit?," Small Business Economics, Springer, vol. 27(4), pages 369-386, December.
    10. Blanchard, Lloyd & Zhao, Bo & Yinger, John, 2008. "Do lenders discriminate against minority and woman entrepreneurs?," Journal of Urban Economics, Elsevier, vol. 63(2), pages 467-497, March.
    11. Robert W. Fairlie & Bruce D. Meyer, 2000. "Trends in Self-Employment among White and Black Men during the Twentieth Century," Journal of Human Resources, University of Wisconsin Press, vol. 35(4), pages 643-669.
    12. Patzelt, Holger & Shepherd, Dean A. & Deeds, David & Bradley, Steven W., 2008. "Financial slack and venture managers' decisions to seek a new alliance," Journal of Business Venturing, Elsevier, vol. 23(4), pages 465-481, July.
    13. Catherine Armington & Zoltan Acs, 2002. "The Determinants of Regional Variation in New Firm Formation," Regional Studies, Taylor & Francis Journals, vol. 36(1), pages 33-45.
    14. James J. Heckman & Hidehiko Ichimura & Petra Todd, 1998. "Matching As An Econometric Evaluation Estimator," Review of Economic Studies, Oxford University Press, vol. 65(2), pages 261-294.
    15. Sascha O. Becker & Andrea Ichino, 2002. "Estimation of average treatment effects based on propensity scores," Stata Journal, StataCorp LP, vol. 2(4), pages 358-377, November.
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    More about this item


    Financial slack; Founding equity; New venture; Propensity score matching.;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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