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Vol: 34, Issue: 3

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Mueller, John M.; Dubofsky, David
financial capital; external funds; debt; credit limits; new firms; Financing
paper description
Financial capital is one of the fundamental resources needed to start and operate a firm (Cooper et al, 1994), and is a main factor in the performance of new firms (e.g. Cressy, 2006; Parker & Van Praag, 2006). Many new firms look for external funds to survive and grow their venture during their early years (Cressy, 2006), since many founders are personally constrained financially due to a lack of personal wealth (e.g. Evans & Jovanovic, 1989). Debt often becomes the first sizeable financing option available to new firms (e.g. Berger & Udell, 1998).While banks can provide debt to assist new firms to overcome the financial constraints they face, they may ration credit to new firms due to information asymmetry prevalent in the relationship with their borrowers (e.g. Stiglitz & Weiss, 1981; Becchetti et al, 2011; Keeton, 1979). With the possibility that creditors ration credit and turn down requests for all or part of the requested funds by viable new firms that objectively should be able to service the debt, new firms will be less able to successfully operate and grow. This suggests that new firms require additional sources of external financing when their initial creditor imposes credit limits on them.Entrepreneurship research suggests that new firms may continue to survive even when rationed credit since the founders who start new firms tend to be persistent, persevere longer than rational decision making models would predict, and are resourceful (Baker & Nelson, 2005; Bhide, 1992; Hmieleski & Corbett, 2008). The resourceful behavior of founders can lead to them tapping into additional credit sources after they have been rationed credit by their primary source (Stiglitz & Weiss, 1981; Myers & Majluf, 1984; Keeton, 1979). Using multiple credit sources could provide access to additional debt capital (capital constraint argument). This leads to the following research question: Does resourceful financing, in the form of multiple credit source usage, affect the performance (survival and growth) of new firms?