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- PublicationInformation asymmetry and capital structure in SMEs : new technology-based firms in the Irish software sectorThis paper examines the capital structure of 117 new technology-based firms in the Irish software sector. In apparent contradiction to the pecking order hypothesis (POH), most external finance is private equity, and debt is virtually absent. We argue that this is consistent with the spirit of the POH – that firms prefer sources of finance associated with the least information asymmetry. For unlisted technology firms this is private equity. Using information on founders’ perceptions gathered via survey, we confirm that software firm founders perceive greater information asymmetries in debt than in equity markets, and they agree that issuing equity sends a positive signal about the value of their firm. Founders also perceive low tax benefits of debt, and very high levels of business risk.
- PublicationCapital structure in new technology-based firms : evidence from the Irish software sectorUsing a sample of 117 Irish software companies, we examine the capital structure of new technology-based firms. Consistent with the findings on financing for other small businesses, internal funds are the most important source of funding in new technology-based firms. However, in apparent contradiction to the pecking order hypothesis, the use of debt is rare and equity financing is the prime source of external finance. By questioning chief executive officers via survey on their perceptions and opinions on various financing issues, we are able to conclude that in many cases software firm founders prefer outside equity to debt. The dearth of debt in the capital structure of new technology-based firms cannot be wholly explained by financing constraints due to information asymmetries in the banking sector.