Beg, Borrow, and Deal? Entrepreneurs’ Choice of Financing and New Firm Innovation

Abstract

Entrepreneurs rely on a spectrum of financing options for new companies. I analyze two key aspects: the role of debt and bank loans in the early financing of new firms and the relationship between financing choice and subsequent innovation trajectory. I use microdata in the confidential Kauffman Firm Survey (KFS) dataset. The results suggest bank loans play a role in early stage financing in firms across a spectrum of high-technology industries. Second, conditional on the initial financing mix I use a two-stage analysis to probe the relationship between financing and innovation. In a novel strategy, I exploit the role of entrepreneurial optimism to discern the relationship between debt financing and innovation outcomes, conditional on the endogenous choice of financing.