Pecking order and debt capacity considerations for high-growth companies seeking financing
Vanacker, Tom Manigart, Sophie
Vanacker, Tom
Manigart, Sophie
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Publication Type
Journal article with impact factor
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Supervisor
Publication Year
2010
Journal
Small Business Economics
Book
Publication Volume
35
Publication Issue
1
Publication Begin page
53
Publication End page
69
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Abstract
This paper examines incremental financing decisions within high-growth businesses. A large longitudinal dataset, free of survivorship bias, to cover financing events of high-growth businesses for up to 8 years is analyzed. The empirical evidence shows that profitable businesses prefer to finance investments with retained earnings, even if they have unused debt capacity. External equity is particularly important for unprofitable businesses with high debt levels, limited cash flows, high risk of failure or significant investments in intangible assets. These findings are consistent with the extended pecking order theory controlling for constraints imposed by debt capacity. It suggests that new equity issues are particularly important to allow high-growth businesses to grow beyond their debt capacity.
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Corporate Finance