Financing Unquoted High-Growth Companies: From Extending

1.1.1. Study 1: Incremental Finance Decisions in High-Growth Companies:
Pecking Order and Debt Capacity Considerations
Managers of high-growth companies typically have multiple types of finance available to finance new
investment projects, including internal finance, debt finance and new equity finance. However,
scholars have typically assumed that internal finance, if available, will be largely insufficient to
finance high growth (Michaelas, Chittenden, and Poutziouris, 1999; Gompers, 1995). Furthermore,
scholars argue that high-growth companies consistently use less debt finance as they grow across time
(Barclay, Smith, and Morellec, 2006). Debt finance is sometimes even considered inappropriate,
especially for high-growth companies active in technology-based industries, given their small or
negative operational cashflows and lack of tangible assets that could serve as collateral (Carpenter and
Petersen, 2002b). Instead, it is proposed that high-growth companies actively use new equity, which is
the most suitable source of finance for high-growth companies (Fama and French, 2005; Frank and
Goyal, 2003; Carpenter and Petersen, 2002b).
Few studies on financial policies in high-growth companies, however, consider a broad range of
finance alternatives, including inside finance, debt finance and new equity finance (Eckhardt, Shane,
and Delmar, 2006), but instead focus on the role of new equity in the creation and growth of new
companies (Davila, Foster, and Gupta, 2003; Carpenter and Petersen, 2002b; Gompers, 1995).
Nevertheless, one of the most influential theories in modern business finance, namely the pecking
order theory, argues that high-growth companies will avoid using new equity when internal finance or
debt finance is available (Myers, 1984). Overall, while prior research stresses the role of new equity in
the financing of high-growth companies, finance theory indicates a more central role for internal funds
and debt finance in companies that are characterized by high informational asymmetry. A more
comprehensive study on the role of different types of finance in high-growth companies is therefore
timely.
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