TITLE:
The Capital Structure of Business Start-Up: Is There a Pecking Order Theory or a Reversed Pecking Order? —Evidence from the Panel Study of Entrepreneurial Dynamics
AUTHORS:
Hédia Fourati, Habib Affes
KEYWORDS:
Pecking-Order Theory; Capital Structure; Asset Specificity; Signaling Theory; Moral Hazard; Credit Rationing; Information Opacity
JOURNAL NAME:
Technology and Investment,
Vol.4 No.4,
November
4,
2013
ABSTRACT: Using the Panel Study of Entrepreneurial Dynamics, we study if the
problems of asymmetry and opacity of information, asset specificity, agency
problem and signaling theory predict the financial structure at inception.
Thus, we conduct a study in two steps. First, by analyzing the descriptive
statistics, we find that novice entrepreneurs turn first to internal sources of
finance. Then, they apply to external debts and finally to equity finance. We
prove then the applicability of the Pecking order theory in case of
entrepreneurial firms. Second, by analyzing the role of financial theory in
predicting the capital structure of entrepreneurial firms we find the following
results. In fact, evidence from analyzing the role of information opacity,
asset specificity and signaling theory, proves that the main source of finance
is equity rather than debt. In the majority of the cases, depth interviews show
from studying the financial theory an inverted pecking order. Two main reasons
for this pattern can be established. First, entrepreneurs consider debt as a
personal liability as it requires to be underwritten by personal guarantees.
Entrepreneurs place a self-imposed limit on the extent to which they are
prepared to mortgage their assets. Second, entrepreneurs deliberately seek out
equity investment as a means of obtaining added value. This external equity
which has been viewed as expensive is viewed as good value. A well chosen
investor can add business skills and social capital in the form of commercial
contacts and access to relevant networks.