Set-Up Costs and the Financing of Young Firms
47 Pages Posted: 25 Jan 2021 Last revised: 22 Jun 2021
Date Written: December 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 leveraging up and 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: young firms, capital structure, set-up costs, leverage, debt maturity, financial frictions
JEL Classification: D21, D22, D25, G32
Suggested Citation: Suggested Citation