Determinants of Capital Structure in New Ventures: Evidence From Swedish Longitudinal Data

Abstract

The early years are seen as a crucial period for the survival of ventures and yet only a limited number of studies have focused on successful new ventures when studying capital structure. Furthermore, only a few studies have included longitudinal data, tracking ventures over time, or have elaborated on the difference between short-term and long-term debt ratios when studying capital structure. In this paper, hypotheses are developed, based on capital structure theories and literature on new venture financing, and are tested on longitudinal empirical data. Results of multivariate analysis, through structural equation modeling, reveals that: (1) asset structure assists in explaining the variance in capital structure;(2) explained variance in dependent variables is decreasing for each of the four years studied; and (3) multi-group analysis reveals that the determinants influence short-term and long-term debt differently in the first four years of venture existence. Implications of this study suggest that determinants of capital structure in new ventures require theorizing of its own and demand special attention in entrepreneurial policy-making. Keywords: Capital structure; new ventures; entrepreneurship; financing; longitudinal study. 277 J. Dev. Entrepreneurship 2006.11:277-296. Downloaded from www.worldscientific.com by UNIVERSITY OF AUCKLAND LIBRARY -SERIALS UNIT on 03/15/15. For personal use only. 278 D. Örtqvist et al.grow and become established. The study investigates financing decisions by analyzing the influences of capital structure determinants over several years in the context of new ventures, as opposed to small and medium enterprises (henceforth SMEs) or large established firms. Finally, this study separates short-and long-term debt ratio when studying the determinants of capital structure. This approach can further advance our understanding of the determinants of capital structure.The risk-return balance represented by the capital structure is critical in any business. However, it is more crucial in the case of new ventures as they often struggle to survive with very low or no income or revenue in the first few years. For this reason, we argue that this study on capital structure determinants of new ventures is important. Furthermore, understanding how capital structures evolve in new ventures undoubtedly has practical implication as it may help us advance our understanding of the reasons for the high mortality rate of new ventures. Any pattern of capital structure associated with potential mortality may then be addressed and possibly avoided. Extending knowledge about the determinants of capital structure in new ventures can then improve the situation for practicing and future entrepreneurs, their stakeholders and the research community.The importance of new ventures to an economy has been well-established in the literature. New ventures have shown great potential in providing employment and long-term economic growth (Romer, 1986;Sutton, 1997;Fritsch and Mueller, 2004). We suggest that studies of capi...

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“…This means it is far more efficient for smaller firms to use internal sources of finance before seeking external financing (Myers, 1984). The TOT predicts a similar relationship on the basis that larger firms are better able to access external debt as they have lower costs of bankruptcy due to more diverse streams of revenue and established operations (Ortqvist et al, 2006). Previous empirical research on SMEs (Cassar, 2004;Klapper et al, 2006;Nguyen & Ramachandran, 2006;Sorgorb-Mira, 2005) and on Chinese enterprises (Huang & Song, 2006;Newman et al, 2011) typically confirms a positive relationship between firm size and leverage.…”

“…Under the TOT, we might also expect such a relationship as firms with greater fixed assets should have lower agency and financial distress costs in the maintenance of debt, making them more attractive to financiers. Yet, despite these theoretical assertions, empirical research on SME financing indicates a positive relationship between asset structure and long-term leverage, but a negative relationship between asset structure and short-term leverage (Cassar and Holmes, 2003;Chittenden et al, 1996;Hall et al, 2000;Ortqvist, Masli, Rahman, & Selvarajah, 2006;Sorgorb-Mira, 2005). Furthermore, most empirical studies investigating this relationship on SMEs in the emerging economy context find no or a negative relationship, between asset structure and leverage (Klapper et al, 2006).…”

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“…In addition, owner‐managers running smaller businesses typically have less experience and access to capital through their social networks. Although there is some evidence to the contrary (Ortqvist, Masli, Rahman, & Selvarajah, 2006), empirical research typically confirms a positive relationship between firm size and leverage for firms in both developed and emerging economies (Cassar, 2004; Degryse et al, 2012; Newman et al, 2012; Sorgorb‐Mira, 2005;). This leads us to the following hypothesis:

Hypothesis 2a: Firm size will be positively related to the use of leverage for Chinese SMEs.

…”

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“…Posteriormente, outros estudos em finanças (C.-C. Yang, Lee, Gu, & Lee, 2010;C. Chang, Lee, & Lee, 2009;Ling, Naranjo, & Nimalendran, 2000;Maddala & Nimalendran, 1995;Örtqvist, Rahman, & Selvarajah, 2006) também adotaram essa técnica estatística para estimar as especificações dos modelos teóricos.…”