Set-Up Costs and the Financing of Young Firms

47 Pages Posted: 25 Jan 2021

Date Written: December 1, 2020

Abstract

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

Derrien, François and Mésonnier, Jean-Stéphane and Vuillemey, Guillaume, Set-Up Costs and the Financing of Young Firms (December 1, 2020). Banque de France Working Paper No. 792, Available at SSRN: https://ssrn.com/abstract=3771327 or http://dx.doi.org/10.2139/ssrn.3771327

François Derrien

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
33 1 39 67 72 98 (Phone)

HOME PAGE: http://www.hec.fr/derrien

Jean-Stéphane Mésonnier (Contact Author)

Banque de France ( email )

Paris
France

Guillaume Vuillemey

HEC Paris ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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