Equity-based Financial Slack and New Venture Performance: Evidence from matched single-founder ventures

摘要

This paper examines whether equity-based financial slack in the form of relatively high levels of founding equity will systematically hurt new venture performance. Drawing on data on 445 single-founder new ventures over the period 2004-2007, it uses the propensity score matching method to estimate the average effect of equity-based financial slack on new venture performance. It finds a negative and statistically significant average effect. This implies that single-founder new ventures that started out with relatively high levels of founding equity subsequently had a relatively low rate of profitability on average. The underlying mechanisms behind this empirical finding are explored, and the implications for the development of existing theory and practice are discussed.