Entrepreneurial Finance and Performance: a Transaction Cost Economics Approach
Abstract: The transaction cost economics project finance framework suggests equity is better suited to projects with high levels of asset specificity while debt is better suited to projects with low levels of asset specificity. We apply this framework to the entrepreneurial finance setting and generate a set of hypotheses. We test these hypotheses using data from the Kauffman Firm Survey to show that (1) firms align their debt ratio with their asset specificity and (2) firm performance is adversely affected when debt and equity are not properly aligned with asset specificity. Our findings highlight the importance of matching the type of finance used to the characteristics of the project.