Article Metrics

Article abstract view : 440 times
PDF full text: 0 times

Determinants of Financing Decisions of Start Up Firms

Priyanka Priyanka, Karam Pal Narwal


Having an optimum capital structure is crucial as it leads the company to its better operating performance. This paper examines the key determinants affecting the financing decision of start-up firms with reference to the Delhi NCR region in India by using panel data regression models. The hypotheses are formed based on theories of capital structure and existing literature. The financial information data of a final sample of 29 manufacturing start-up firms are taken into consideration for empirical analysis. The results of this research revealed that firm size, growth opportunities, profitability and liquidity are key factors significantly affecting the capital structure decision of start-up firms in India. The relationship found for firm size, profitability and liquidity supported the hypothesis of pecking order theory while growth variable results supported the hypothesis of trade-off theory. Therefore, the pecking order theory is found to be more applicable here in startup firms in India.


Start-up firms; capital structure; finance; determinants; leverage

Full Text:



Abor, J. (2008). Determinants of the capital structure of Ghanaian firms. African Economic Research Consortium (AERC), 1-34.

Abor, J., and Biekpe, N. (2009). How do we explain the capital structure of SMEs in sub-Saharan Africa? Journal of Economic Studies, 36(1), 83-97.

Achleitner, AK. , Braun, R. and Kohn, K. (2011). New venture financing in Germany: Effects of firm and owner characteristics. Z Betriebswirtsch, 81, 263-294.

Ang, J.S. (1991). Small business uniqueness and the theory of financial management. Journal of Small Business Finance, 1 (1), 1-13.

Benkraiem R. and Gurau C. (2013). How do corporate characteristics affect capital structure decisions of French SMEs? International Journal of Entrepreneurial Behaviour & Research, 19(2), 149-164.

Berger, A.N. and Udell, G.F. (1998). The economics of small business finance: The roles of private equity and debt markets in the financial growth cycle. Journal of Banking and Finance, 22(6-8), 613-673.

Bhat, D.A., Chanda U. and Bhat A. K. (2020). Does firm size influence leverage? Evidence from India. Global Business Review, 1-10.

Cassar, G. (2004). The financing of business Start-ups. Journal of Business Venturing, 19(2), 261-283.

Cassar, G.and Holmes, S. (2003). Capital structure and financing of SMEs: Australian evidence. Accounting and Finance, 43(2), 123-147.

Chadha, S. and Sharma, A.K. (2015). Determinants of capital structure: An empirical evaluation from India. Journal of Advances in Management Research, 12(1), 3-14.

Chakraborty I. (2010). Capital structure in an emerging stock market: The case of India. Research in International Business and Finance,24, 295-314.

Cole, R.A., and Sokolyk, T.(2018). Debt financing, survival, and growth of start-up firms. Journal of Corporate Finance, 50, 609-625.

Coleman, S., Cotei, C., and Farhat, J. (2016). The debt equity financing decisions of US start-up firms. Journal of Economics and Finance, 40(1), 105-126.

Deloof, M., &Vanacker, T. (2018). The recent financial crisis, start-up financing and survival. Journal of Business Finance & Accounting, 45(7-8), 928-951.

Denis, D.J. (2004). Entrepreneurial finance: an overview of the issues and evidence. Journal of Corporate Finance, 10 (2), 301-326.

Econmic survey 2020-21 retrieved from

Elomo P.N. (2014). Determinants of capital structure of startup firms in South Africa. Masters Dissertation, University of the Witwatersrand.

Gartner, W.B., Frid, C.J. and Alexander, J.C. (2012). Financing the emerging firm. Small Business Economics, 39(3), 745-761.

Handoo, A., and Sharma, K. (2014). A study on determinants of capital structure in India. IIMB Management Review, 26(3), 170-182.

Hirsch, J., & Walz, U. (2019). The financing dynamics of newly founded firms. Journal of Banking & Finance, 100, 261-272.

Honjo, Y. (2017). Capital structure of start-up firms: An international comparison. Center for Research on Startup Finance, Working paper series no. 001.

Honjo, Y. (2021). The impact of founders’ human capital on initial capital structure: Evidence from Japan. Technovation, 100, 102-191.

Huang, G. and Song, F.M. (2006). The determinants of capital structure: Evidence from China. China Economic Review, 17(1), 14-36.

Huyghebaert, N. and Van De Gucht, L.M. (2007). The determinants of financial structure: new insights from business start-ups. European Financial management, 13(1), 101-133.

Kraus,A. and Litzenberger, R.H. (1973). A state preference model of optimal financial leverage. The Journal of Finance, 28(4), 911-922.

Loan, B.T.T, Thang, N.X., Mai, D.P. and Anh, P.T. (2020). The determinants of capital structure: a case study. Journal of Security and Sustainability Issues, 9, 5-17.

Modigliani, F., & Miller , M. (1958). The cost of capital, corporation finance, and the theory of investment. American Economic Review, 48(3), 261-297.

Modigliani, F., & Miller , M. (1963). Corporate income taxes and the cost of capital, a correction. American Economic Review, 32(2), 261-276.

Myers, S. C. (2001). Capital structure. Journal of Economic perspectives, 15(2), 81-102.

Myers, S.C. and Majluf N.S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics,13 (2),187-221.

Napompech K. (2013). Determinants of capital structure of small firms in Thailand. Trends in Apllied Sciences Research, 8(2), 92-104.

Ohman, P. and Yazdanfar, D. (2017). Short and long-term debt determinants in Swedish SMEs. Review of Accounting and Finance, 16(1), 1-20.

Onofras, N. (2012). What are the determinants of the leverage of entrepreneurial companies, Master Thesis, Tilburg University, Netherlands.

Ortqvist, D., Masli, E.K., Rahman, S.F. and Selvarajah, C. (2006). Determinants of capital structure in new ventures: Evidence from Swedish longitudinal data. Journal of Developmental Entrepreneurship, 11(4), 277-296.

Paul, S., Whittam, G. and Wyper, J. (2007). The pecking order hypothesis: does it apply to start‐up firms? Journal of Small Business and Enterprise Development, 14(1), 8-21.

Psillaki, M., and Daskalakis, N. (2009). Are the determinants of capital structure country or firm specific? Small business economics, 33(3), 319-333.

Rajan, R.G. and Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, 50 (5), 1421-1460.

Rao, P., Kumar, S. and Madhavan, V. (2019). A study on factors driving the capital structure decisions of small and medium enterprises (SMEs) in India. IIMB Management Review, 31(1), 37-50.

Robb, A.M. and Robinson, D.T. (2014). The capital structure decisions of new firms. The Review of Financial Studies, 21(1), 153-179.

Sakr, A., and Bedeir, A. (2019). Firm-level determinants of capital structure: Evidence from Egypt. International Journal of Financial Research, 10(1), 68-85.

Scherr, F. C., Sugrue, T. F., and Ward, J. B. (1993). Financing the small firm start-up: determinants of debt use. Journal of Small Business Finance, 3(1), 17-36.

Sheikh, N. A., and Wang, Z. (2011). Determinants of capital structure: An empirical study of firms in manufacturing industry of Pakistan. Managerial Finance, 37(2), 117-133.

Shivalik Singh and M. H. Bala Subrahmanya (2022). Quantum of finance obtained by tech startups over the lifecycle: An analysis of its determinants, International Review of Applied Economics, 36(2), 187-204.

Sofat, R. and Singh, S. (2017). Determinants of capital structure: an empirical study of manufacturing firms in India. International Journal of Law and Management, 59(6), 1029-1045.

Titman, S., and Wessels, R. (1988). The determinants of capital structure choice. The Journal of Finance, 43(1), 1-19.

Copyright (c) 2022 Priyanka Runach, Karam Pal Narwal

Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

International Research Journal of Business Studies has been covered by the following services:

Image result for university of Saskatchewan small logo