Working Paper: CEPR ID: DP14512
Authors: Francois Derrien; Jean-Stéphane Msonnier; Guillaume Vuillemey
Abstract: We show that set-up costs are a key determinant of the capital structure of young firms. Theoretically, when firms face high set-up costs, they can only be established by lengthening debt maturity. Empirically, we use a large sample of French firms to show that young firms have a significantly higher leverage and issue longer-maturity debt than seasoned companies. As predicted by the model, these patterns are stronger in high set-up cost industries and for firms with lower profitability. Last, we show that, following an exogenous shock that reduces banks' supply of long-term loans, young firms in high set-up cost industries grow significantly less.
Keywords: young firms; setup costs; leverage; debt maturity; capital structure; financial frictions
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in banks' supply of long-term loans (G21) | Adverse effect on growth of young firms in high setup cost industries (L26) |
| High setup costs (D29) | Transmission of financial shocks to young firms (F65) |
| Financial constraints (D10) | Capital structure of new enterprises (G32) |
| High setup costs (D29) | Longer debt maturity (H63) |
| High setup costs (D29) | Higher leverage of young firms (L26) |
| Longer debt maturity (H63) | Higher leverage of young firms (L26) |