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Pecking order and debt capacity considerations for high-growth companies seeking financing

Pecking order and debt capacity considerations for high-growth companies seeking financing This paper examines incremental financing decisions within high-growth businesses. A large longitudinal dataset, free of survivorship bias, to cover financing events of high-growth businesses for up to 8 years is analyzed. The empirical evidence shows that profitable businesses prefer to finance investments with retained earnings, even if they have unused debt capacity. External equity is particularly important for unprofitable businesses with high debt levels, limited cash flows, high risk of failure or significant investments in intangible assets. These findings are consistent with the extended pecking order theory controlling for constraints imposed by debt capacity. It suggests that new equity issues are particularly important to allow high-growth businesses to grow beyond their debt capacity. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Small Business Economics Springer Journals

Pecking order and debt capacity considerations for high-growth companies seeking financing

Small Business Economics , Volume 35 (1) – Oct 28, 2008

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References (69)

Publisher
Springer Journals
Copyright
Copyright © 2008 by Springer Science+Business Media, LLC.
Subject
Business and Management; Management; Microeconomics; Entrepreneurship; Industrial Organization
ISSN
0921-898X
eISSN
1573-0913
DOI
10.1007/s11187-008-9150-x
Publisher site
See Article on Publisher Site

Abstract

This paper examines incremental financing decisions within high-growth businesses. A large longitudinal dataset, free of survivorship bias, to cover financing events of high-growth businesses for up to 8 years is analyzed. The empirical evidence shows that profitable businesses prefer to finance investments with retained earnings, even if they have unused debt capacity. External equity is particularly important for unprofitable businesses with high debt levels, limited cash flows, high risk of failure or significant investments in intangible assets. These findings are consistent with the extended pecking order theory controlling for constraints imposed by debt capacity. It suggests that new equity issues are particularly important to allow high-growth businesses to grow beyond their debt capacity.

Journal

Small Business EconomicsSpringer Journals

Published: Oct 28, 2008

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