Abstract:
Most of the existing literature on financial performance determinants of companies suggests that
capital structure decisions are of paramount importance. This is likely to be particularly so due to
the present financing constraints. However, very few studies focus on startups, probably due to
their lack of track record.
The situation is more severe in the SMEs case since no focus is given on the matter to SMEs
startups in the literature. Once startups can give a good contribution to improve industrial
performance, there seems to be a need for a better understanding of the financing constraints of
startups, how they can be overcome and, also, to what extent startups’ financing decisions have
influence on their financial performance.
This work contributes to this problematic by studying the impact of capital structure on startups
financial performance, based on information for the years 2010 and 2011 of a sample of 21
SMEs startup firms. The startups’ sample was obtained from startups incubated in SMEs
performance. This study is based on a linear regression model explaining the influence of the
capital structure (the key explanatory variable) on financial performance (measured by relative
sales’ financial performance).
The regression also includes other (control) variables considered important to explain the
complex financial performance phenomenon of companies. These variables are firm’s size, age
and liquidity. The estimation results clearly show that the debt-to-equity ratio, the measure used
for capital structure, and the age of startups have a negative impact on sales’ financial
performance, while liquidity and size have a positive one. The results suggest that the amount of
debt raised by startups should be controlled, and that they should move rapidly from the
exploratory to the execution phase in order to favor the financial performance of the company.
