Debt Signaling and Outside Investors in Early Stage Firms

Journal of Business Venturing, Forthcoming

52 Pages Posted: 1 Nov 2016 Last revised: 21 Feb 2019

See all articles by Mircea Epure

Mircea Epure

Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE)

Martí Guasch

Tilburg University - School of Economics and Management

Date Written: February 6, 2019

Abstract

By imposing a market like governance and directing entrepreneurs towards professional management, debt, and especially business debt, can serve as a reliable signal for outside equity investors. Such signals of firm accountability can alleviate the stringent information asymmetry at the early stages of the firm, and become stronger for bank business debt, in the presence of personal debt, and in high capital industries. Using the Kauffman Firm Survey, we find evidence consistent with our hypotheses. Outside investors can rely on the governance role of debt and its underpinnings such as the bank-firm relationship. We also corroborate that young firms tend to focus on growth rather than profitability.

Keywords: governance; entrepreneurship; financing; information asymmetry; debt; equity

JEL Classification: G32, M13, M40

Suggested Citation

Epure, Mircea and Guasch, Martí, Debt Signaling and Outside Investors in Early Stage Firms (February 6, 2019). Journal of Business Venturing, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2861848 or http://dx.doi.org/10.2139/ssrn.2861848

Mircea Epure (Contact Author)

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

HOME PAGE: http://mirceaepure.com

Barcelona Graduate School of Economics (Barcelona GSE)

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Martí Guasch

Tilburg University - School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://https://sites.google.com/view/marti-guasch

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