Financing Unquoted High-Growth Companies: From Extending

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finance entails fixed debt-related payments; when a company is unable to fulfill these payments both indirect and direct bankruptcy costs will decrease company value (Figure 1.1.). Additionally, highly levered companies with significant growth opportunities may face an underinvestment problem and company shareholders may forego value-creating investments (Myers, 1977). In these highly levered companies additional investments may disproportionately benefit debtholders, while shareholders have to carry the entire cost of new investments. <strong>Companies</strong> may avoid that agency conflicts emerge between debtholders and shareholders by reducing debt levels. In the static trade-off theory companies have an optimal capital structure where the marginal cost of an additional euro of debt finance equals the marginal benefit of an additional euro of debt finance (Figure 1.1). Moreover, it is proposed that companies make incremental finance decisions in such a way that they gradually move towards their target (optimal) debt ratio. Market value of firm Source: Shyam-Sunder and Myers (1999), pp. 220. FIGURE 1.1 The Static Trade-off Theory of Capital Structure PV interest tax shields Firm value under all-equity financing Optimum PV costs of financial distress A different perspective is the pecking order theory (Myers, 1984; Myers and Majluf, 1984). In a pecking order framework, the cost related to the existence of informational asymmetries between company managers and investors is of first-order importance, while the costs and benefits proposed in Debt 11
the static trade-off theory are only of second-order importance. Informational asymmetry entails that while business managers have private information on the value of assets in place and future growth options, outside investors can merely estimate these values. When outside investors underestimate the value of debt or equity issued by a company, this company may decide not to accept the finance and scale down or completely abandon valuable investment projects. The undervaluation of the securities offered by a company may be so severe that when the company accepts prohibitively expensive external finance to execute new investment projects this may damage company value. <strong>Companies</strong> may avoid these problems by financing projects internally (Myers, 1984). Moreover, debt finance will be preferred to new equity finance because the information problems are lower when companies issue new debt (Myers, 1984). When companies have no cashflow problems debtholders are guaranteed companies will be able to fulfill the fixed debt-related payments. Nevertheless, new shareholders are not sure that companies will distribute sufficiently high dividends over time as these are neither fixed nor required. In summary, companies prefer to finance new investments with internal funds, which are not subject to asymmetric information problems. When internal funds are insufficient to meet the finance needs, managers will turn to more costly outside funds. In this situation, companies are expected to issue the safest securities first as these will suffer less from information asymmetries (Myers, 1984). This implies managers will first raise debt finance and only consider new equity as a final option. Finally, it is important to note that in a pecking order framework companies have no target debt ratio. Debt ratios merely reflect companies’ cumulative past requirements for external finance (Myers, 1984). These two different perspectives, often presented as competing frameworks, sparked a vast stream of large-sample empirical studies testing which framework performs best in explaining real-world financing behavior (López-Garcia and Sogorb-Mira, 2008; Fama and French, 2005; Frank and Goyal, 2003; Shyam-Sunder and Myers, 1999). The standard versions of both theories, however, appear to be inadequate. A particularly important problem for the static trade-off theory is that some of the most successful companies –e.g. Microsoft– succeed by using no or limited debt finance thereby foregoing 12
Page 1 and 2: Faculty of Economics and Business A
Page 3: Financing Unquoted High-Growth Comp
Page 7 and 8: Acknowledgements This dissertation
Page 9 and 10: calls. We know everything about eac
Page 11 and 12: 1.4. Company Growth as a Complex Or
Page 13 and 14: 3.5.3. Alternative Explanations for
Page 15 and 16: List of Tables Chapter 1 Table 1.1
Page 17 and 18: List of Figures Chapter 1 Figure 1.
Page 19 and 20: De tweede studie gaat na hoe versch
Page 21 and 22: Executive Summary High-growth compa
Page 23 and 24: development as a whole. The process
Page 25 and 26: The rest of this introduction is st
Page 27 and 28: More significantly, finance scholar
Page 29 and 30: Furthermore, in light of current fi
Page 31 and 32: 1.2.1. Amount of Finance A first di
Page 33: Empirical research confirms that co
Page 37 and 38: track record, will heavily rely on
Page 39 and 40: 1.2.4. Dynamics Companies have to m
Page 41 and 42: focusing on the acquisition of vent
Page 43 and 44: Moreover, historical finance decisi
Page 45 and 46: I. TELEOLOGY FIGURE 1.3 Process Mod
Page 47 and 48: 1.4.1. Growth Indicators, Growth Fo
Page 49 and 50: TABLE 1.2 Overlap (%) between Diffe
Page 51 and 52: Study 1: Incremental Finance Decisi
Page 53 and 54: accessible for a limited number of
Page 55 and 56: FIGURE 1.4 Early-Stage Entrepreneur
Page 57 and 58: Overall, a low level of entrepreneu
Page 59 and 60: timeframe of the study 3 . However,
Page 61 and 62: are collect through the financial a
Page 63 and 64: Two drawbacks of the Zephyr databas
Page 65 and 66: accurately remembering finance even
Page 67 and 68: experience of venture capital firms
Page 69 and 70: founding. The increased professiona
Page 71 and 72: investments internally and not to a
Page 73 and 74: contribute to the acquisition of ot
Page 75 and 76: constraints (Himmelberg and Peterse
Page 77 and 78: 1.9. Structure of the Dissertation
Page 79 and 80: Chandler G.N. and Hanks S.H. (1998)
Page 81 and 82: Gregory B.T., Rutherford M.W., Oswa
Page 83 and 84: Manigart S., De Waele K., Wright M.
Page 85 and 86:
Van Auken H. (2001) “Financing sm
Page 87 and 88:
2.1. Abstract This study examines i
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Companies do not continuously raise
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future expansion, financial distres
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Despite contradictory empirical fin
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lowers company value and in turn in
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Hypothesis 2: High-growth companies
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had to be for at least two years am
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2.4.2. Dependent Variables: Finance
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Percentage of firms using: TABLE 2.
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Noteworthy is the high correlation
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Internal finance: TABLE 2.4 Variabl
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Internal finance: (EARNINGS/TOTAL A
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in the probability of raising exter
Page 113 and 114:
Additional analyses on smaller sub-
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Our results are important for acade
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Barclay M.J., Smith Jr., C.W. and M
Page 119 and 120:
Helwege J. and Liang N. (1996) “I
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Ou C. and Haynes G.W. (2006) “Acq
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Chapter 3: Seeking Experienced or L
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(Rindova, Williamson, Petkova and S
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higher growth paths both in employm
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The accumulated experience may not
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offer finance by venture capital in
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around three to five years (Zarutsk
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effects of this potential confound.
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It is conceptually convenient to de
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it indicates how the mean initial s
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The results of the unconditional an
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significant quadratic trend. In thi
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exhibit steeper growth curves both
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obustness of the positive relations
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employment and intangible assets ra
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3.6. Discussion and Conclusion Most
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suggest that venture capital firms
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Baum J.A.C., Calabrese T. and Silve
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Hoang H. and Rothaermel F.T. (2005)
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Peixoto J.L. (1987) “Hierarchical
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Appendix 1: Robustness Check In the
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Chapter 4: Early Differences and Pe
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financial resource mobilization fro
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processes that make it difficult fo
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Biotechnology, 2002). The biotechno
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Table 4.2 differentiates between hi
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to follow-up interviews, (4) financ
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informants had difficulties in accu
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for ventures to replicate the succe
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A good illustration is the differen
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corporate investor related to a big
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In contrast to the image portrayed
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4.5.2. Initial Differences in Growt
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TABLE 4.6 Local Search and the Impa
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investors related to the venture, a
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persist across time and suggest it
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performing biotechnology parent com
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“In our venture capital firm the
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Additionally, our cases illustrate
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(Gargiulo, 1993). He approached not
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that the availability and suitabili
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and Eisenhardt, 2008). In this cont
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ventures are often depicted as pass
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Eisenhardt K.M. (1989b) “Agency t
Page 209 and 210:
Katila R., Rosenberger J.D. and Eis
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Sorenson O. and Stuart T.E. (2001)
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Chapter 5: Limitations, Avenues for
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and despite these low leverage rati
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Additionally, early investors may i
Page 219 and 220:
5.2.1. Entrepreneurs By studying th
Page 221 and 222:
investment strategy. Given the requ
Page 223:
Lerner J. (1999) “The government
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