Start-up Costs and The Capital Structure of Young Firms

We show that start-up costs are a prime determinant of the capital structure of young firms. First, we document novel facts. While they are in principle more financially constrained, young firms exhibit higher leverage and raise longer-maturity debt than old firms. This holds true both across and within firms. Second, we show theoretically that fixed start-up costs can explain with these facts. Third, we estimate start-up costs at the industry-level and test novel predictions from the model in a large sample of newly-created French firms. Fourth, we use a quasi-natural experiment to study the real implications of start-up costs. Upon a negative shock to banks, there is lower firm creation in industries with higher start-up costs. Thus, we highlight a new source of heterogeneity in the transmission of financial shocks, which can help to explain slow recoveries.