THE DETERMINANTS OF DEBT AND (PRIVATE) EQUITY FINANCING: THE CASE OF YOUNG, INNOVATIVE SMEs FROM GERMANY

摘要

Recently the CEO of a large German public bank noted that German start-ups should be financed almost exclusively with equity, since debt financing is not appropriate for bearing the huge risks that newly founded firms entail. In this paper we investigate whether young, small and medium-sized enterprises (henceforth SMEs) classified as innovative firms indeed favour equity financing, and explore the factors determining their choice of financing mode. Financial theory discusses the optimal financial structure of firms extensively. But empirical evidence on the choice of the financing mode in young high-tech SMEs is rather limited. Our paper contributes towards closing this gap. Much of the literature on financial contracting focuses on debt contracts, which are often assumed rather than derived as the optimal method of financing. However, as de Meza and Webb (1987) point out, some distorting phenomena like rationing (Stiglitz and Weiss 1981) may simply disappear if equity contracts are allowed. Despite the clear-cut results on the relation between the type of asymmetric information and the preferred financial instrument in de Meza and Webb (1987), the theoretical results on financing decisions are far from conclusive. In particular, the impact of both the intrinsic and the financial risk on selecting either debt or equity financing remains an unresolved issue.