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The Capital Structure Decisions of New Firms

From a banker's perspective, it might seem that lending directly to finance a business start-up is not an activity that banks are much involved in. However, a study by Alicia Robb at UC Santa Cruz and visiting scholar at the Atlanta Fed and David Robinson at Duke's Fuqua School of Business shows that banks have been an important source of financing for business start-ups. While a bank might not make many direct business loans to start-ups, home equity loans, personal bank loans, and credit card lines of credit are important ways individuals have been able to finance start-up activity. The recent sharp declines in home equity values and tightening of credit card standards are therefore potential impediments to start-up activity.

"The Capital Structure Decisions of New Firms"off-site image
Alicia M. Robb and David T. Robinson
NBER Working Paper No. 16272
August 2010


This paper investigates the capital structure choices that firms make in their initial year of operation, using restricted-access data from the Kauffman Firm Survey. Contrary to many accounts of start-up activity, the firms in our data rely heavily on external debt sources such as bank financing, and less extensively on friends and family-based funding sources. This fact is robust to numerous controls for credit quality, industry, and business owner characteristics. The heavy reliance on external debt underscores the importance of well functioning credit markets for the success of nascent business activity.


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