Debt signaling and outside investors in early stage firms

Mircea Epure, Marti Guasch

Research output: Contribution to journalArticleScientificpeer-review

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.
Original languageEnglish
JournalJournal of Business Venturing
Publication statusAccepted/In press - 2019

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Industry
Profitability
Investors
Debt
Governance
Entrepreneurs
Equity
Information asymmetry
Accountability
Debt management
Bank-firm relationships

Cite this

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Debt signaling and outside investors in early stage firms. / Epure, Mircea; Guasch, Marti.

In: Journal of Business Venturing, 2019.

Research output: Contribution to journalArticleScientificpeer-review

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AB - 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.

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