Discussion Paper Details

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Title: Set-up Costs and the Financing of Young Firms

Author(s): Francois Derrien, Jean-Stéphane Mésonnier and Guillaume Vuillemey

Publication Date: March 2020

Keyword(s): Capital Structure, debt maturity, Financial Frictions, leverage, set-up costs and Young firms

Programme Area(s): Financial Economics

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.

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Bibliographic Reference

Derrien, F, Mésonnier, J and Vuillemey, G. 2020. 'Set-up Costs and the Financing of Young Firms'. London, Centre for Economic Policy Research.