Set-Up Costs and the Financing of Young Firms
44 Pages Posted: 25 Mar 2020
Date Written: March 2020
We show that set-up costs are a key determinant of the capital structure of young firms. Theoretically, when firms face high set-up costs, they can only be established by lengthening debt maturity. Empirically, we use a large sample of French firms to show that young firms have a significantly higher leverage and issue longer-maturity debt than seasoned companies. As predicted by the model, these patterns are stronger in high set-up cost industries and for firms with lower profitability. Last, we show that, following an exogenous shock that reduces banks' supply of long-term loans, young firms in high set-up cost industries grow significantly less.
Keywords: Capital Structure, debt maturity, Financial Frictions, leverage, set-up costs, Young firms
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