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Capital Structure at Inception and the Short-Run Performance of Micro-Firms

This paper examines the financial structure and performance of a sample of 150 young micro-firms. Their average age is one and a half years; and their average size is three full-time employees. Short-run performance is measured over one year, in terms of continuing to trade, and the evidence is analysed using a split sample comparison, and probit analysis. The general finding is that financial structure is not a major determinant of performance in this, the very earliest, phase of the life-cycle of the micro-firm. Whilst it is possible to identify specific financial features which may favour survival (e.g. the availability of trade credit) or may threaten survival (e.g. the use of extended purchase commitments), conventional features of financial structure (e.g. assets, gearing) do not play a significant role. However, other (non-financial) explanations of early-stage survival are available, invluding the use of advertising and business planning, and the avoidance of precipitate product innovation. This suggests that market features and internal organisation of the micro-firm may dominate financial structure as determinants of survival in the very earliest phase of the life-cycle.

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Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9607.

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Date of creation: Oct 1996
Date of revision:
Handle: RePEc:san:crieff:9607
Contact details of provider: Postal: School of Economics and Finance, University of St. Andrews, Fife KY16 9AL
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  1. Oi, Walter Y, 1983. "Heterogeneous Firms and the Organization of Production," Economic Inquiry, Western Economic Association International, vol. 21(2), pages 147-71, April.
  2. Chittenden, Francis & Hall, Graham & Hutchinson, Patrick, 1996. " Small Firm Growth, Access to Capital Markets and Financial Structure: Review of Issues and an Empirical Investigation," Small Business Economics, Springer, vol. 8(1), pages 59-67, February.
  3. Vickers,Douglas, 1987. "Money Capital in the Theory of the Firm," Cambridge Books, Cambridge University Press, number 9780521328418, October.
  4. von Ungern-Sternberg, Thomas, 1990. "The Flexibility to Switch between Different Products," Economica, London School of Economics and Political Science, vol. 57(227), pages 355-69, August.
  5. Gavin C Reid & Lowell R Jacobsen., . "The Small Entrepreneurial Firm," Hume Papers 8, David Hume Institute.
  6. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Reid, Gavin C., 1991. "Staying in business," International Journal of Industrial Organization, Elsevier, vol. 9(4), pages 545-556, December.
  8. Brown, Charles & Medoff, James, 1989. "The Employer Size-Wage Effect," Journal of Political Economy, University of Chicago Press, vol. 97(5), pages 1027-59, October.
  9. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  10. van der Wijst, Nico & Thurik, Roy, 1993. " Determinants of Small Firm Debt Ratios: An Analysis of Retail Panel Data," Small Business Economics, Springer, vol. 5(1), pages 55-65, March.
  11. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  12. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-70, May.
  13. Arulampalam, W. & Robin A. Naylor & Jeremy P. Smith, 2002. "University of Warwick," Royal Economic Society Annual Conference 2002 9, Royal Economic Society.
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