Do initial financial conditions determine the fate of start-up firms?

Yuji Honjo () and Masatoshi Kato
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Yuji Honjo: Faculty of Commerce, Chuo University

No 139, Discussion Paper Series from School of Economics, Kwansei Gakuin University

Abstract: Using a survival analysis approach, this paper investigates the impact of initial financial conditions on the post-entry performance of firms. We examine whether initial financial conditions affect the duration of survival among start-up firms in Japan, distinguishing between failure and merger. We provide evidence that start-up firms that rely more on equity than debt financing are less likely to fail within a shorter period, but we find little evidence that initial equity size has a significant effect on the likelihood of failure. Moreover, we find the negative effect of equity financing on the likelihood of failure to be greater for start-up firms founded following the abolition of regulations governing a minimum paid-in capital requirement. Furthermore, the results reveal that start-up firms with larger initial equity are more likely to exit through merger. Overall, the findings suggest that initial capital structure is a critical determinant of exit route.

Keywords: Business failure; Competing risk; Equity financing; Initial financial conditions; Merger (search for similar items in EconPapers)
JEL-codes: C24 G32 M13 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2016-01, Revised 2016-01
New Economics Papers: this item is included in nep-cfn, nep-ent and nep-sbm
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:139

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