Does capital structure affect the performance of startups? The Finnish evidence

Abstract

This thesis examines the capital structure impacts on the performance of Finnish start-ups. The literature has documented the pecking order theory as being the most suitable capital structure theory to use to explain financing decisions of start-ups, due to a lack of financial history and an agency problem. New ventures are largely financed by debt, and capital is seen as the crucial determinant of start-up performance.

This study brings new aspects to the previous Finnish start-up literature. Start-ups are identified using a specific tool and the empirical analysis focuses only on quantitative measures and financial statement data. The data set consists of 1,118 firms founded between 2010 and 2015. The study focuses on three different performance measures, namely, sales growth, profitability growth, and return on assets (ROA). OLS-regression, with firm and time fixed effects are the main empirical methods used.

Based on these data, on average, 88% of Finnish start-up capital structure is debt. The internal finance proportion is small, and on average, the firms are not profitable. The empirical analysis of this study suggests that capital structure is irrelevant determinant of performance, when performance is measured by sales growth. Interestingly, when performance of these firms is measured by profitability growth, then the long- term debt ratio has positive effects. However, when performance is measured by ROA, long- and short- term debt ratios can have a negative effect. Capital structure influence on performance is dependent on the performance measure used as the literature suggested. Further, these findings are in line with the findings of Shutjens and Wever (2000) that indicated that capital structure is not the main determinant of new venture performance.