Non-Financial Stakeholder Relationship Costs as a Determinant of Capital Structure: Empirical Evidence from First-Time Business Start-Ups

49 Pages Posted: 17 Jun 2006

See all articles by Tom Franck

Tom Franck

Lessius Hogeschool

Nancy Huyghebaert

KU Leuven - Department of Accountancy, Finance and Insurance

Date Written: April 2006

Abstract

Titman (1984) is the first to argue that non-financial stakeholders (customers, suppliers and employees) pass on their expected liquidation costs to the firm. In his framework, firms can influence the probability of liquidation by choosing an appropriate capital structure. Other studies have reasoned that the bargaining power of non-financial stakeholders (NFS) may also impact on financing decisions. This paper investigates these ideas in a sample of first-time business startups, where ex-ante failure risk is high and NFS have to make relationship-specific investments. We find that the size of NFS liquidation costs significantly reduces leverage and the proportion of bank loans. These effects are strengthened when customers have strong bargaining power. Finally, start-ups reduce their reliance on bank loans when suppliers and employees are in a powerful bargaining position.

Keywords: capital structure, start-ups, non-financial stakeholders, liquidation costs, bargaining power

JEL Classification: C31, G21, G32, G33

Suggested Citation

Franck, Tom and Huyghebaert, Nancy, Non-Financial Stakeholder Relationship Costs as a Determinant of Capital Structure: Empirical Evidence from First-Time Business Start-Ups (April 2006). EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=909201 or http://dx.doi.org/10.2139/ssrn.909201

Tom Franck (Contact Author)

Lessius Hogeschool ( email )

Leuven, B-3000
BELGIUM

Nancy Huyghebaert

KU Leuven - Department of Accountancy, Finance and Insurance ( email )

Naamsestraat 69
B-3000 Leuven, 3000
Belgium
00 32 16326737 (Phone)
00 32 16326683 (Fax)

HOME PAGE: http://www.econ.kuleuven.be/eng/fetew/medewerker/Userpage.aspx?PID=524

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