IS THE COST OF DEBT CAPITAL HIGHER FOR YOUNGER FIRMS?

ABSTRACT Not much is known about the returns to aging (maturing) in the market for small business finance. Using a large panel of closely held micro firms, we document that the cost of debt capital is higher for young firms. The main finding of this paper is that this negative qualitative relation i...

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Bibliographic Details
Published in:Scottish journal of political economy 2007-02, Vol.54 (1), p.55-71
Main Authors: Hyytinen, Ari, Pajarinen, Mika
Format: Article
Language:English
Subjects:
Access to credit
Business studies
Capital
Capital costs
Corporate finance
cost of debt capital
Credit
Data analysis
Debt management
Debts
Economic Theories
Financial management
Finland
firm age
fixed effects
G14
G21
G31
G32
Small and medium sized enterprises
small business finance
Small Businesses
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Summary:ABSTRACT Not much is known about the returns to aging (maturing) in the market for small business finance. Using a large panel of closely held micro firms, we document that the cost of debt capital is higher for young firms. The main finding of this paper is that this negative qualitative relation is also obtained when cross‐sectional variation in unobservable creditworthiness of small businesses and within‐firm (i.e., inter‐temporal) variation in their observable creditworthiness are held constant. We control for the former by firm‐specific fixed effects and for the latter by a commercial credit score. We also provide an estimate of the quantitative magnitude of the aging effect, on which both economic theory and earlier empirical research are silent. We find that when a small business ages one year, its cost of debt capital decreases by 1–2 basis points. The effect is neither negligible nor alarmingly large.
ISSN:0036-9292
1467-9485
DOI:10.1111/j.1467-9485.2007.00404.x