Incremental Financing Decisions in High Growth Companies: Pecking Order and Debt Capacity Considerations
37 Pages Posted: 2 Mar 2008 Last revised: 26 Dec 2010
Date Written: August 1, 2007
The purpose of this paper is to study incremental financing decisions within high growth businesses. For this purpose, we use a large longitudinal dataset, free of survivorship bias, covering financing events of high growth businesses for up to eight years. 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.
Keywords: Financing Decisions, Pecking order theory, Debt capacity, Growth
JEL Classification: G32
Suggested Citation: Suggested Citation