Professionalization and debt financing of new ventures : evidence from the United States

Abstract

Small businesses significantly rely on debt financing. However, it is challenging for them to convince the lenders on their creditworthiness because of the agency problems rooted in information asymmetry. Professionalization, as one of the signal devices, may carry positive information about a small firm since it helps enhance the firm value by aligning owner and manager’s interests. If firm value goes up, the financial leverage drops without any new external debt financing. Thus, it is safer for the lenders to provide the capital. Unfortunately, whether professionalization helps mitigate the lender-borrower conflict of interest has not been investigated in the previous literature. This study intends to help fill in this gap by investigating the influence of professionalization on small business debt financing. Our empirical results show that professionalization tends to increase the use and the amount of new venture debt financing. Findings also indicate that the solution to owner-manager agency problem can also help alleviate the creditor-shareholder conflict of interests in new venture debt financing.