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

Morgan, Horatio M. (2013): Equity-based Financial Slack and New Venture Performance: Evidence from matched single-founder ventures.

Abstract

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial slack; Founding equity; New venture; Propensity score matching.
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L26 - Entrepreneurship; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M13 - New Firms ; Startups

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