DP14512 Set-up Costs and the Financing of Young Firms
|Author(s):||Francois Derrien, Jean-Stéphane Mésonnier, Guillaume Vuillemey|
|Publication Date:||March 2020|
|Keyword(s):||Capital Structure, debt maturity, Financial Frictions, leverage, set-up costs, Young firms|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14512|
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.