Financing Unquoted High-Growth Companies: From Extending

valuable interest tax shields (Brealey and Myers, 2000). More significantly, debt ratios did not change
considerably in the last decades despite significant changes in corporate tax levels over the same
period (Frank and Goyal, 2005; Brealey and Myers, 2000). A particularly important problem for the
standard pecking order theory is that debt ratios are typically low in high-technology, high-growth
industries, despite significant external finance needs (Fama and French, 2005; Frank and Goyal, 2005;
Brealey and Myers, 2000). Both static trade-off and pecking order proponents are fine-tuning
abovementioned standard versions of their theories to account for known facts. Trade-off theorists are
currently developing dynamic tradeoff models, while pecking order theorists are focusing their efforts
on the development of an extended pecking order theory -incorporating the notion of debt capacity-
and the development of more complex adverse selection models (Frank and Goyal, 2005).
The first study “Incremental Finance Decisions in High-Growth Companies: Pecking Order and Debt
Capacity Considerations” builds further on this tension in modern business finance. It contributes to
the literature on the extended pecking order theory by more fully developing the notion of debt
capacity. While prior research generally defines debt capacity as sufficiently high debt ratios that
restrain a company from raising additional debt finance, this paper demonstrates the key role of
cashflows necessary to fulfill the fixed debt-related payments. The goal of this study is not to test
whether the pecking order or static trade-off theory performs best in a sample of high-growth
companies. Rather it demonstrates the value of combining both perspectives in order to increase our
understanding of financial decision-making.
1.2.3. Source of Finance
A third important dimension of financial decision-making relates to the finance source. Particularly
influential is the financial growth cycle as proposed by Berger and Udell (1998). Based on pecking
order considerations and optimal security design this life-cycle model indicates that different sources
of finance become more or less important when companies become larger, older and more
informationally transparent. Figure 1.2 indicates that startups, which are highly uncertain and lack a
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