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.