Setup Costs and the Financing of Young Firms

Firm births are key drivers of employment growth, productivity gains, and “creative destruction.” We show that setup costs create sizable financial constraints for new firms. When firms face high setup costs, they can only be established by leveraging up and lengthening debt maturity. We empirically confirm these predictions in a large sample of young French firms. Leverage is higher and debt maturity is longer in industries with high setup costs. Last, we show that following an exogenous shock that reduces banks’ supply of long-term loans, there is relatively lower firm creation in manufacturing industries with high setup costs.

This paper was accepted by Bo Becker, finance.

Funding: This work was supported by Observatoire du financement des entreprises par le marché (OFEM) (NA) and Agence Nationale de la Recherche [Grant F-STAR ANR-17-CE26-0007-01].

Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.03846.