Determinants of Capital Structure in Business Start-Ups : The Role of Nonfinancial Stakeholder Relationship Costs

According to the finance literature, nonfinancial stakeholders (NFS), such as customers, suppliers, and employees, take into account their expected liquidation costs when dealing with a firm. In this framework, firms can influence their probability of liquidation by choosing an appropriate capital structure. Also, the literature suggests NFS bargaining power may affect firm financing decisions. In the current article we investigate these ideas for initial financing decisions by business start-ups, where ex ante failure risk is high and NFS must decide whether to make relationship-specific investments. We find that start-ups imposing larger costs on their NFS following liquidation significantly reduce leverage. This effect is strengthened when suppliers have greater bargaining power. We also document a marginally negative effect of NFS liquidation costs on the proportion of bank loans. Finally, business start-ups rely less on bank loans when customers and suppliers are in a powerful bargaining position