Paper #1546

Title:

Debt signaling and outside investors in early stage firms

Authors:

Mircea Epure and Martí Guasch

Date:

November 2015 (Revised: February 2019)

Abstract:

By imposing a market like governance and directing entrepreneurs towards professional management, debt, and especially business debt, can serve as a reliable signal for outside equity investors. Such signals of firm accountability can alleviate the stringent information asymmetry at the early stages of the firm, and become stronger for bank business debt, in the presence of personal debt, and in high capital industries. Using the Kauffman Firm Survey, we find evidence consistent with our hypotheses. Outside investors can rely on the governance role of debt and its underpinnings such as the bank-firm relationship. We also corroborate that young firms tend to focus on growth rather than profitability.

Keywords:

governance; entrepreneurship; financing; information asymmetry; debt; equity

JEL codes:

G32, M13, M40

Area of Research:

Management and Organization Studies / Finance and Accounting

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