1. The Capital Structure Decisions of New Firms Alicia M. Robb, University of California, Santa Cruz & Kauffman Foundation David T. Robinson, Duke University, Fuqua School of Business Il finanziamento delle piccole e medie imprese: uno strumento per superare la crisi economica URBINO, Martedì 21, Mercoledì 22 Aprile 2009

2. Outline Motivation & Theoretical Background Data Findings Conclusion

3. Motivation There is a widely held view that startup firms face credit constraints The inability to access formal credit markets drives many firms to pursue financing from informal channels to finance their startup activity  Relationship lending (Peterson and Rajan, 1994, 2000; Berger and Udell, 1998)

4. Motivation, continued What theories best describe the capital structure decisions of new firms?  Pecking Order of Myers and Majluf (1984)  Life-Cycle theory by Berger and Udell (1998)  Other theories? We investigate the capital structure choices that firms make in the first year of operation, using new longitudinal data on firm startups in the United States.

5. Kauffman Firm Survey Longitudinal survey of new businesses in the United States Collected information on nearly 5,000 firms that began operations in 2004 and surveys them annually Detailed information on firm characteristics, owner characteristics, financing at startup and over time Original project was a 4 year panel---it was recently extended to be an 8 year panel (collecting data for calendar years 2004 through 2011). Currently there are four years of data available (2004-2007).

6. Detailed Data: Baseline & Over Time Firm characteristics Industry, Legal Form, # of Owners, # of Employees (PT/FT), Types of Customers, Location Firm strategy and innovation Product/Service Offerings, Intellectual Property, Licensing In, Licensing Out, R&D Detailed financial information Equity & Debt Financing, Income Statement Info (Revenue, Expenses, Profits), Balance Sheet Info (Assets, Liabilities) Employees Types of Benefits Offered, Task/Work Structure Owner characteristics and work behaviors (Information on up to 10 owners) Education, Age, Race, Ethnicity, Gender, Citizenship, Immigrant Status, Hours Worked, Previous Years of Work Experience, Previous Start-up Experience (same/different industry as this firm)

7. Classification Scheme Debt  Owner Financing  Informal Financing  Formal Financing Equity  Owner Financing  Informal Financing  Formal Financing Security Design Identity & Relationship of the investor to the firm Lines between business and personal finance are often blurred for new and small firms

17. Separating Credit Supply from Credit Demand We regress the firms credit score on variables that proxy for demand-side factors that would influence credit ratings. We consider two models. First, we run the following regression: score ij = α + β j + i (1) where score ij is the credit score of firm i in industry j, β j are industry fixed effects. The first estimation simply includes a set of 60 industry dummies. For the second specification, we run the following regression: score ij = α + β j + γF ij + ŋK ij + i (2) where score ij is the credit score of firm i in industry j, β j are industry fixed effects, F is a vector of owner characteristics and K is a vector of firm characteristics

21. Does Financial Access Affect Firm Performance? Probit Analysis 2007 Outcomes: Revenue 100K+, Profits 50K+, Assets 50K+, Employment Key explanatory variables  Ratio of outside debt  Level of 2004 sales

23. Conclusions New firms rely to a surprising degree on debt provided through formal credit channels Notion of friends, family, and fools seems misleading given our findings Informal investors are important for the handful of firms that rely on outside equity, but most firms turn elsewhere Roughly 80% of firms’ start up capital is made up in equal parts of owner equity and bank debt Equity and debt are complements, not substitutes Findings underscore the importance of liquid credit markets for the formation and success of young firms.

24. Thank you! arobb@ucsc.edu davidr@duke.edu