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The Demand for Debt Finance by Entrepreneurial FirmsNancy HuyghebaertKU Leuven - Department of Accountancy, Finance and Insurance Cynthia Van HulleKU Leuven - Department of Applied Economics Linda M. Van De GuchtKU Leuven - Department of Applied Economics February 2001 EFA 2001 Barcelona Meetings; K.U. Leuven, Department of Applied Economics Working Paper No. 0110 Abstract: We model the entrepreneurial firm's choice of debt finance, allowing for debt renegotiations in the event of financial distress. We differentiate two sources of debt finance, bank debt and trade credit, by the implicit equity stake that lenders hold in the borrowing firm. Lenders with a large implicit equity stake, such as suppliers, adopt a more lenient liquidation policy when firms have a relatively high liquidation value, but set a higher price for their credit. Entrepreneurs, who have private information about their probability of financial distress, borrow exclusively from lenders with a small implicit equity stake, such as banks, only when the price advantage of bank debt outweighs the cost of a stricter enforcement of liquidation rights. Entrepreneurs who prefer the lenient liquidation policy adopted by suppliers contract only partial bank finance in order to avoid a potential default against the bank. Using data on a sample of 152 true business start-ups in the manufacturing sector, we provide empirical evidence that supports this theoretical model.
Number of Pages in PDF File: 69 JEL Classification: C70, G32, G33 working papers seriesDate posted: March 21, 2001Suggested CitationContact Information
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