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
Date Written: February 6, 2019
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: Suggested Citation