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How Debt Creates Pressure to Perform when Information Asymmetries are Large: Empirical Evidence from Business Start‐ups |
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| Authors: | Tom Franck Nancy Huyghebaert Bert D’Espallier |
| Affiliation: | 1. Katholieke Universiteit Leuven, Lessius Hogeschool and National Bank of Belgium De Berlaimontlaan 14 1000 Brussels, Belgium tom.franck@nbb.be;2. Katholieke Universiteit Leuven Naamsestraat 69 3000 Leuven, Belgium Nancy.huyghebaert@econ.kuleuven.be;3. Katholieke Universiteit Leuven, Lessius Hogeschool Korte Nieuwstraat 33 2000 Antwerp, Belgium Bert.despallier@lessius.eu |
| Abstract: | In this paper, we empirically examine how leverage affects firm performance when information asymmetries are large. We argue that entrepreneurs are strongly incentivized to maximize earnings when leverage is high in order to reduce the likelihood of adverse credit decisions and firm liquidation. Our empirical tests focus on the effects of leverage on firm profitability and growth in earnings during a 5‐year window after start‐up for a large and unique sample of newly established ventures in Belgium. Accounting for the endogeneity of leverage, the data reveal that more highly indebted business start‐ups are not only more profitable but also realize larger earnings growth. Moreover, the positive effect of leverage on firm profitability intensifies as the venture matures. |
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