The Capital Structure of Business Start-Up: Is There a Pecking Order Theory or a Reversed Pecking Order?

Novice entrepreneur must think about financial theory when financing business start-up?

Little empirical validation of pecking order prediction has been previously developed for a sample of business start-up. In addition, studies the role of financial theories (information opacity, agency problem, transaction costs, signaling theory and human capital) as determinant of capital structure are limited to SME.

In Hédia FOURATI research review, published in Technology and Investment 2013 vol.4 by Scientific Research Publishing. Using a sample of 1214 novice American entrepreneur, they prove then the applicability of the Pecking order theory in case of entrepreneurial firms. Second, by analyzing the role of financial theory in justifying the capital structure of entrepreneurial firms they find the following results. In fact, evidence from analyzing the role of information opacity, asset specificity and signaling theory, prove 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, it 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.(View Original Post, please click here

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