The debt-equity financing decisions of U.S. startup firms

Abstract

We examine the debt-equity decisions of startup firms using the Kauffman Firm Survey, the largest database of U.S. startups launched in 2004. To control for sample selection bias and the correlation among financing decisions, we employ a Bivariate Probit-Tobit model. Our results show that several firm characteristics such as growth prospects, firm size, tangible assets, and selling products, as well as owner characteristics such as net worth, experience, education and ethnicity explain the debt-equity decisions in the startup year. In addition, for firms that use debt, we document traits that explain the use of a particular type of business versus personal debt. Larger firms use more business debt, whereas home-based and growth firms use more personal sources of debt. Immigrants, owners who lack work experience and those who invest more time in the business tend to rely more on personal sources of debt.