DETERMINANTS OF CAPITAL STRUCTURE IN BUSINESS START-UPS: THE ROLE OF NONFINANCIAL STAKEHOLDER RELATIONSHIP COSTS

Authors


  • The authors thank Enrique Arzac, Hans Degryse, Antoon De Rycker, John Doukas, Evgeny Lyandres, Phil Molyneux, Sheila O’Donohoe, Armin Schwienbacher, Anil Shivdasani, Linda Van de Gucht, Alexandra Van den Abbeele, Steve Van Uytbergen, Frank Verboven, Josef Zechner, the editor (Jayant Kale), and the reviewer (Gordon Phillips) at the Journal of Financial Research, and participants at the 2005 annual conference of the European Financial Management Association (Milan), 3rd Corporate Finance Day (K.U. Leuven), the 2005 international meeting of the Association Française de Finance (Paris), and the 2006 annual meeting of the European Finance Association (Zurich) for valuable comments. They are also grateful to Luc Sels, Bart Cambré, Johan Maes, and Christine Vanhoutte for providing them with the sample data.

Abstract

According to the finance literature, nonfinancial stakeholders (NFS), such as customers, suppliers, and employees, take into account their expected liquidation costs when dealing with a firm. In this framework, firms can influence their probability of liquidation by choosing an appropriate capital structure. Also, the literature suggests NFS bargaining power may affect firm financing decisions. In the current article we investigate these ideas for initial financing decisions by business start-ups, where ex ante failure risk is high and NFS must decide whether to make relationship-specific investments. We find that start-ups imposing larger costs on their NFS following liquidation significantly reduce leverage. This effect is strengthened when suppliers have greater bargaining power. We also document a marginally negative effect of NFS liquidation costs on the proportion of bank loans. Finally, business start-ups rely less on bank loans when customers and suppliers are in a powerful bargaining position.

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