Start-Up Financing: Outside Equity

35 Pages Posted: 23 Oct 2007

See all articles by Hans K. Hvide

Hans K. Hvide

University of Bergen - Department of Economics; University of Aberdeen - Business School; Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Aksel Mjøs

Norwegian School of Economics (NHH) - Department of Finance

Abstract

We investigate the extent to which start-ups use outside equity, and interpret our results in relation to financial contracting theory. We do so by studying the start-up and founder characteristics that are associated with the use of outside equity financing, using a unique dataset from Norway. Our findings suggest that adverse selection are less of a concern for start-ups than ex-post opportunistic behavior (risk shifting) by the entrepreneur as in Myers (1977) and Ravid & Spiegler (1997). One implication of this finding is that outside equity and debt are complements rather than substitutes, and that an extra unit of equity financing has a multiplicative effect on total financing through releasing additional debt financing. We do not find convincing evidence that the use of outside equity has detrimental effects on entrepreneurial effort, nor that a possible shortage of available outside equity leads to investor monopolization and excessive investor returns. Thus we provide evidence that outside equity provides an important avenue for entrepreneurs to escape liquidity constraints.

Keywords: capital structure, entrepreneurship, credit constraints, liquidity constraints

JEL Classification: D02, D82, G21, G33

Suggested Citation

Hvide, Hans and Mjøs, Aksel, Start-Up Financing: Outside Equity. Available at SSRN: https://ssrn.com/abstract=1023942 or http://dx.doi.org/10.2139/ssrn.1023942

Hans Hvide (Contact Author)

University of Bergen - Department of Economics ( email )

Fosswinckelsgt. 6
N-5007 Bergen, 5007
Norway

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom

HOME PAGE: http://hans.hvide.googlepages.com/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Institute for the Study of Labor (IZA) ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Aksel Mjøs

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

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