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This paper examines how economic policy uncertainty impacts the likelihood of mergers and acquisitions as an exit route for startups. Our results show that an increase in policy uncertainty reduces the likelihood of mergers and acquisitions in startups. We argue that EPU negatively impacts the likelihood of M&A activity by increasing both the risk premium for the target firms and the cost of developing the absorptive capacity for the acquirer firm. However, startups that can build competitive advantage and can demonstrate innovative capabilities through the presence of intellectual property are more likely to exit via merger and acquisition, even in high policy uncertainty. Our results are robust after controlling for macro-level indicators and other model specifications. The study contributes to the growing literature that examines the impact of policy uncertainty on various aspects related to businesses in general and startups in particular.

We examine the M&A exit behavior of new, young businesses and the way the exit is shaped by their innovative capabilities and their growth in employment. Using a large sample of startups founded in 2004, we find that businesses organized as corporations had very different acquisition outcomes than those organized as sole proprietorships. These different acquisition outcomes could be explained by differences in innovation and growth potential in the startup year as well throughout the business’ lifetime. Our results suggest that higher innovation and employment growth explain the likelihood of M&A exit for new, young corporations but not for sole proprietorships. These results indicate that acquirers value the growth potential signaled by corporations through intellectual property rights and growth in employment and, therefore, businesses with high quality innovations are the most attractive targets for acquisitions. Young corporations with external equity investors are more likely to become M&A targets, as angels or venture capitalists have the first opportunity to liquidate some or all their equity holdings when the business becomes an acquisition target. Our results also show that young corporations owned by serial entrepreneurs are more likely to become M&A targets. From an acquirer’s perspective, entrepreneurs with startup experience are typically favored due to their proven ability to realize the growth potential of a venture as well as their willingness and ability to harvest value for themselves and their investors.

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.

This study examines the role of information asymmetry on insurer price adjustments in response to earnings surprises and the effects of competing measures of earnings surprises on the value of insurers during 1998–2007. Using the surprise portfolio approach, we find that investors in insurance stocks react to “street earnings” rather than accounting earnings. Our results support the differential information hypothesis that smaller-size insurers, those with higher residuals in daily stock returns, and those followed by fewer analysts convey more information to market participants, generating higher cumulative abnormal returns in response to earnings surprises. In addition, we find that property-casualty insurers with lower asset transparency and life-health insurers with extensive use of reinsurance have more informative earnings announcements.

PurposeThis paper aims to examine the link between financing patterns, information asymmetry and legal traditions in 37 countries during the 1990‐2004 period.Design/methodology/approachThe analysis is based on three theories: the trade‐off theory, pecking order hypothesis and market timing hypothesis. The authors test the predictions of these theories/hypotheses using regression analysis. The econometric method used is panel data with firm and country fixed effects. The authors develop a modified pecking order model which controls for short‐ and long‐term debt level changes and simultaneously test the predictions of all theories.FindingsConsistent with studies for US firms, the results show that firms across all countries adjust toward the target leverage, but with significantly different rate. The long‐term debt contribution in the rate of adjustment is 64 percent in common law countries and 51 percent in civil law countries. The ability of the model to explain changes in leverage ratios is higher in common law countries. The authors find support for market timing hypothesis but no support for pecking order of financing. These results support their conjecture that stronger investor protection, higher transparency and well‐developed financial markets in common law countries reduce the cost of recapitalization.Research limitations/implicationsThe limitation of this study comes from lack of data availability to measure contract enforcement, transparency, and corporate governance variables. Future research can incorporate these variables to explain the differences in capital structure decisions across countries with different legal systems.Practical implicationsThe findings show that firms' capital structure decisions are not only a function of their own characteristics but also the result of legal and financial market development in which they operate.Originality/valueThis is the first study that sheds light about rate of adjustment to optimal capital structure and pecking order of financing in 37 countries with different legal traditions and financial market developments. The authors are not aware of any other study that uses a modified pecking order model in an international context.

Most of the previous studies on the firms’ debt-equity choice utilize the standard single equation Probit (or Logit) model as if firms face a single dichotomous decision to issue debt or equity, but not both. The main purpose of this study is to use a two stage Bivariate Probit–Tobit model to examine the factors affecting the choice between internal and external funding and between debt and equity as well as the size of issues. Our results indicate that the Bivariate-Probit estimation is more efficient than that of two independent Probit equations. An examination of factors that affect the choice of financing form and the size of issue support the predictions of trade-off theory. The pecking order’s prediction that, if external funding is needed, firms issue debt first and then equity finds no support in this study as firms with higher information asymmetry have propensity to issue equity rather than debt. While information asymmetry affects the choice between debt and equity, we find no evidence that it influences the size of issue.

In this article, we examine how startup firms finance their operations over time. We empirically test the financial growth cycle theory developed by Berger and Udell (1998) using the Kauffman Firm Survey data, the largest longitudinal data set comprised of all U.S. startups launched in 2004. Simultaneously, we examine whether the pecking-order and trade-off theories explain the changes in capital structure of startups from inception to the later stages of development. Consistent with the predictions of financial growth cycle theory, at the startup stage, entrepreneurs rely on initial insider capital sources, such as personal savings, financing offered by friends and family, quasi-equity, and personal debt. Over time, as firms become less opaque, the proportion of business debt and trade credit financing in the total capital injection volume increases significantly. Although the proportion of owner’s equity in total capital injections decreases over time, the annual balance of owner’s equity increases, suggesting that owners use retained earnings to increase their ownership stake in the firm.

We analyze a private firm’s likelihood of exiting through a merger or acquisition. To test our hypotheses we use the confidential version of the Kauffman Firm Survey data, the largest longitudinal dataset of newly formed businesses in the United States. Our results show that firms with R&D activity and those characterized by lower information asymmetry are more likely to become M&A targets. We also show that having intellectual property rights such as copyrights, patents and trademarks does not significantly affect the firm’s likelihood to exit through M&A. These results suggest that acquirers value the growth potential signaled through R&D rather than the existing intellectual property and therefore, firms with high quality innovations are the most attractive targets for acquisitions. The hypothesis that venture-backed firms are more likely to become M&A targets finds strong support in our analysis. Angels or venture capitalists have the first opportunity to liquidate some or all their equity holdings when the firm becomes an acquisition target. Our results also show that firms owned by serial entrepreneurs are more likely to become M&A targets. From an acquirer’s perspective, entrepreneurs with start-up experience are typically favored due to their proven ability to realize the growth potential of a venture as well as their willingness and ability to harvest value for themselves and their investors.

We analyze the impact of firm’s asset uniqueness and its growth opportunities on the leasing decisions of U.S. startups. To test our hypotheses, we use a unique dataset provided by the Kauffman Foundation. Our results show that startups in the high-technology sector have a lower propensity to lease whereas startups with high R&D intensity have a higher propensity to lease. In addition, we examine the impact of owners’ characteristics on the decisions to lease and find that female and older entrepreneurs as well as highly educated owners are less likely to lease. Our findings confirm previous studies on leasing decisions that larger and more leveraged businesses have a higher propensity to lease their assets. Consistent with Ang and Peterson (1984) and Bathala and Mukerjee (1995) we report that leasing and debt are complements rather than substitutes to each other.

Small business owners use a variety of bootstrap financing methods to acquire the needed resources necessary to survive and eventually grow their businesses. One such method is to lease equipment and/or machinery. Leasing is a viable alternative to bank financing and for small businesses, leasing is a flexible strategy to preserve cash. In this study, we analyze the impact of asset specificity and growth opportunities on leasing decisions of a large cohort of startup businesses. To test our hypotheses, we use a unique dataset provided by the Kauffman Foundation. 1 Our longitudinal analyses show that startups with unique/specific assets have a lower propensity to lease whereas startups with high growth opportunities are more likely to lease their assets. We also argue that the owners’ demographic and socioeconomic characteristics are likely to impact their individual risk-taking behavior. Thus, factors such as owners’ experience, education, age, gender, and race are likely to impact the decision to lease assets. Our results show that owners’ characteristics do have a significant impact on these decisions. The findings reveal that female and older entrepreneurs as well as highly educated owners are less likely to lease. Our work advances prior research on the determinants of leasing in large, publicly traded firms and provides additional insights on entrepreneurial bootstrapping.

This paper examines the effects of competing measures of earnings surprises on the value of insurance firms for a sample of 105 Life-Health insurers and 109 Property-Casualty insurers during the 1998-2007 period. Using the surprise portfolio approach, we find that investors in insurance stocks react to "street earnings" rather than accounting earnings and there is a positive relation between the magnitude and direction of earnings surprises and cumulative abnormal returns. Our results support the differential information hypothesis in the context of insurance industry. The evidence shows that smaller size insurers, those with higher information asymmetry and those followed by fewer analysts convey more information to market participants, generating higher cumulative abnormal returns in response to earnings surprises.

We examine new firms created in 2004 and track their business status in the following four years using the Kauffman Firm Survey data. For firms that exited the sample during the 2004-2008 period, we distinguish between voluntary firm closure in the form of merger or acquisition and compulsory firm closure in the form of failure/permanently closed operations. We apply duration analysis with competing risks to test the effect of owner, business and industry characteristics on firm survival, closure and exit through M&A. The results show that by not taking into account the reason for exit (M&A versus permanently closed operations) we underestimate survival rates. In addition, factors that characterize closed businesses are different from those that characterize businesses that were sold or merged with other businesses.

This paper investigates the question of market efficiency in a sample of thirty-four emerging markets with different legal systems. We use both dollar and local currency returns to examine whether exchange rate effects can improve our understanding of the information flows in these capital markets. Using various tests, we find that market efficiency rate is higher for dollar denominated returns than for local currency returns. Contrary to our predictions, we find weak evidence that one country’s legal system contributes to the level of market efficiency. At the minimum, we can state that for local currency returns, civil law countries seem to have markets that are more efficient compared to those in common law countries. Overall, the findings are consistent with the suggestion that exchange rate reforms as well as exchange rate fluctuations may introduce biases that can affect market efficiency.

In this paper, we examine the differences in information asymmetry and financing patterns and a generalized version of the trade-off theory across countries with different institutional environments. We find that firms in Civil law countries have higher information asymmetry, rely more on internally generated funds, and use more short-term debt to finance their financing deficit, relative to those in Common law countries. In both Civil law and Common law countries, factors suggested by the trade-off theory explain the financing deficit coefficient in the generalized version of the trade-off model. Overall, the generalized version of the trade-off theory provides a better explanation for the changes in capital structure relative to the pecking order theory, even in countries with higher information asymmetry.

We examine the role of venture capital backing on informational externalities generated by IPO firms. Theoretical models predict that going public firms generate positive externalities creating a spillover effect for other firms to go public. In this paper, we posit that venture backed IPOs convey positive information about industry and this information is transferred to rival firms. We also hypothesize that intra-industry information transfer varies with rivals’ characteristics and IPO price revisions generate additional information that affects rivals’ valuation. The results show that rivals have positive valuation effects in response to venture backed IPOs and no significant reaction in response to non-venture backed IPOs. We find evidence that the effect on rival firms is stronger if they operate in less concentrated industries and have high growth opportunities. The larger the IPO proceeds, the higher the magnitude of rivals ‘valuation effects. Positive (negative) information revealed in the form of upward (downward) price revisions significantly impacts rivals’ reaction in response to venture backed IPOs.

The main purpose of this study is to simultaneously examine the pecking order and trade-off theories of capital structure and determine which one performs better for a sample of US firms. Our empirical models, which allow the financing coefficient and the rate of adjustment to vary with the firms' characteristics, provide evidence that the trade-off theory factors play a significant role in determining the proportion of debt to be issued or repurchased under the pecking order assumptions. In addition, we find that the pecking order factors are major determinants of the rate of adjustment under the trade-off theory assumptions. These empirical results imply that the pecking order theory and the trade-off theory are not mutually exclusive.

Most of the previous studies on the firms’ debt-equity choice utilize the standard single equation Probit (or logit) model as if firms face a single dichotomous decision to issue debt or equity, but not both. In this study, we examine the factors affecting the choice between internal and external funding and between debt and equity as well as the size of issues using a two stage Bivariate Probit-Tobit model. Our results indicate that the Bivariate-Probit estimation is more efficient than that of two independent Probit equations. An examination of factors that affect the choice of financing form and the size of issue support the predictions of trade-off theory. The pecking order’s prediction that, if external funding is needed, firms issue debt first and then equity finds no support in this study as firms with higher information asymmetry have propensity to issue equity rather than debt. While information asymmetry affects the choice between debt and equity, we find no evidence that it influences the size of issue.