Capital Structure in New Technology-Based Firms: Financing in the Irish Software Sector

Abstract

Using a sample comprising 117 Irish software companies, we examine the capital structure of new technology-based firms. Consistent with the findings on financing for other small business, internal funds are the most important source of funding in new technology-based firms. However, contrary to the pecking order hypothesis, the use of debt is rare and equity financing dominates external sources of finance. By questioning chief executive officers via survey on their perceptions and opinions on various financing issues, we are able to conclude that in many cases software firm founders prefer outside equity to debt. The scarcity of debt in the capital structure of new technology-based firms cannot be wholly explained by financing constraints due to information asymmetries in the banking sector.