Incumbent Strategic Behavior in Financial Markets and the Exit of Entrepreneurial Start-Ups

Abstract

This paper empirically investigates the forces that shape the post-entry exit probability of entrepreneurial start-ups, with an emphasis on the impact of incumbents' strategic behavior in financial markets. We find that entrepreneurial start-ups in highly competitive industries are more likely to exit and that leverage compounds this exit risk. However, the latter result only holds when potential adverse selection and moral hazard problems in financial markets are large at start-up. Under these circumstances, competitors can negatively influence creditors' perceptions on entrepreneurial quality or behavior through aggressive strategic actions to impede future financing and induce the start-up's exit.

Keywords: Strategic behavior, exit, entrepreneurial firms, start-up, capital structure, predation