Beg, Borrow, and Deal? Entrepreneurs' Choice of Financing and New Firm Innovation

33 Pages Posted: 18 Mar 2010 Last revised: 21 Apr 2014

Date Written: March 15, 2011

Abstract

Entrepreneurs rely on a spectrum of financing options for new companies. I analyze two key aspects: the role of debt and bank loans in the early financing of new firms and the relationship between financing choice and subsequent innovation trajectory. I use microdata in the confidential Kauffman Firm Survey (KFS) dataset. The results suggest bank loans play a role in early stage financing in firms across a spectrum of high-technology industries. Second, conditional on the initial financing mix I use a two-stage analysis to probe the relationship between financing and innovation. In a novel strategy, I exploit the role of entrepreneurial optimism to discern the relationship between debt financing and innovation outcomes, conditional on the endogenous choice of financing.

Keywords: New firms and startups, entrepreneurial finance, capital structure, technological innovation

JEL Classification: M13, G32, G21, O34

Suggested Citation

Winston Smith, Sheryl, Beg, Borrow, and Deal? Entrepreneurs' Choice of Financing and New Firm Innovation (March 15, 2011). Available at SSRN: https://ssrn.com/abstract=1573685 or http://dx.doi.org/10.2139/ssrn.1573685

Sheryl Winston Smith (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

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