Unlike traditional start-ups, innovative start-ups and their respective market partners are faced with severe problems of asymmetric information due to their lack of prior production history and reputation. Here, we study whether and how entrepreneurial signaling via education can help innovative entrepreneurs signal their abilities to banks and prospective employees. We argue that innovative entrepreneurs signal their quality by means of certain characteristics of their educational history. In particular, we expect potential employees to use an entrepreneur’s university degree as a quality signal when deciding whether to accept a job at an innovative start-up, and we expect banks to use a more precise indicator, namely the actual length of study in relation to a standard length, as a signal when deciding to extend credit to an innovative founder. By contrast, traditional start-ups are not faced with the same problems of asymmetric information, so we do not expect employees or banks to require the same signals from them. We empirically test our hypotheses using a dataset of more than 700 German start-ups collected in 1998/99. All hypotheses are borne out by the data.
Small Business Economics – Springer Journals
Published: Dec 4, 2006
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