A Dynamic View on the Financing of Extreme Growth Companies

This paper researches the determinants of financing decisions of extreme growth companies. For this purpose, we use a longitudinal dataset, free of survivorship bias, covering the financing events of extreme growth companies for up to eight years. Results are generally consistent with the extended pecking order theory. Profitable companies are more likely to use internal finance, while they have unused debt capacity, which is contrary to the predictions of the static trade-off theory. External equity is used as a last resort. Nearly 20% of the firms issuing external equity have a negative shareholders' equity in the previous year. Finally, consistent with the static trade-off theory, companies with a higher probability and costs of financial distress and higher agency costs are more likely to issue external equity financing.