Incremental Financing Decisions in High Growth Companies: Pecking Order and Debt Capacity Considerations

This paper researches the determinants of incremental financing decisions made by high growth companies. For this purpose, we use a longitudinal dataset, free of survivorship bias, covering the financing events of high growth companies for up to eight years. Results are generally consistent with the extended pecking order theory controlling for constraints imposed by debt capacity. Profitable companies have a preference for internal finance, even if they have unused debt capacity. External equity is particularly important for unprofitable companies with high debt levels, limited cash flows, high risk of failure and significant investments in intangible assets. As a result, findings suggest that high growth companies do not deliberately issue external equity, but rather are pushed towards external equity when there are no alternatives, such as retained earnings and financial debt.