Start-Up Costs and the Capital Structure of Young Firms
We show that start-up costs are a prime determinant of the capital structure of young firms. First, we use a rich dataset of firm-level balance sheets and loan-level debt issues to document novel facts. While they are in principle more financially constrained, young firms exhibit higher leverage and raise longermaturity debt than old firms. Second, we show theoretically that fixed start-up costs can explain these facts. Third, we estimate start-up costs and test novel predictions from the model. Fourth, we use a quasi-natural experiment to study the real implications of start-up costs. We exploit a negative shock to some banks’ supply of maturity to firms at the end of 2008, associated with the failure of a large lender to municipalities, for which some banks had to substitute. Since municipalities borrow longer-term loans than firms and banks have to cap their overall exposure to asset-liability maturity mismatches, this created a negative supply shock on the maturities offered by these banks to firms. We indeed find evidence of a lower maturity of new loans supplied by treated banks to firms in industries with higher start-up costs. Furthermore, young firms affected by this negative maturity supply shock exhibit a lower profitability and a lower tangible capital ratio after two years than other young firms. Thus, we highlight real effects of shocks reducing the ability of banks to supply longer-term loans.