Written by Adv. Divyasha Mathur
Small firms and start-ups are an important source of innovation, international trade and economic development. According to Forbes, over 70% of start-ups fail each year because of premature scaling. When an entrepreneur needs to raise money to fund new business operations, he or she must decide which type of security it will issue to interested parties. So, the question arises as to what are the considerations guiding start-ups to make this financing decision between debt or equity financing, given the juxtaposition between the two?
The prime focus of this paper is to examine the factors affecting the capital structure decisions of new business ventures. The above research question is analysed by using economic and legal methodologies. A generalist approach has been adopted while comparing debt versus equity financing by taking the support of theoretical formulations laid down by famous economists and their effects on start-ups. After recognizing significant constraints in the fundraising process while starting a new business venture, fundamental notions and theories that influence our economic thinking have been dealt with while making a financing choice between debt and equity, particularly for start-ups. Comparative analysis has been made between debt and equity as sources of financing by touching their respective economic features – i) cost of financing; ii) risk; and iii) control. Moreover, possible tax implications for making the debt-equity choice while commencing a new business venture have also been discussed. This paper does not focus on the civil and corporate qualifications of debt and equity in detail since the same vary from country to country. Additionally, the above research question is being dealt from the point of view of entrepreneurs looking to start a new business venture and not from the investor’s point of view due to overlapping conflicts and a vast difference in priorities.
This paper consists of six sections. The brief introduction of my topic under Section 1 will be followed by Section 2 presenting basic characteristics of the two financing options. Section 3 consists of their distinct tax effects and the existing tax induced bias towards debt. Thereafter, Section 4 captures three broad economic determinants of capital structure supported by theoretical frameworks that can help the start-ups decide between debt and equity. Section 5 consists of other factors that may affect the financing decision-making process. Finally, in the concluding Section 6, I will conclude my research question by providing a short summary of the findings laid down in the other sections along with my opinion on a start-up’s capital structure and the role played by taxes in making the appropriate choice.
2. Salient features and sources of debt and equity
The ways of raising capital can be classified into two broad categories – owned capital (i.e equity) and borrowed capital (i.e debt). Equity capital is known as the owner’s investment in a business, taking the form of long-term funds provided by investors such as preferred stock, common stock and retained earnings.  It does not have to be repaid as per specific defined terms and it qualifies the investors as owners combined with features of power and control. Typical sources of equity capital are owner’s personal savings and also belonging to the owner’s family and friends; venture capitalists; angel investors and issuance of shares through IPO. Here, investors take a greater risk for their capital and hence, they earn the right to receive a very high return. Debt capital is referred to any form of borrowed funds that must be paid back in accordance with certain terms and conditions such as interest, mode and frequency of payments, default conditions and the like. The most common sources of debt are loans from banks, bonds, asset based borrowing and trade credit. Entrepreneurs have ample choice to pick from a bucket full of financing options. Most start-up companies enter the entrepreneurial world by means of traditional modes of financial resources such as bank loans, money from friends and family, seed investment, angel investors and venture capital investments. Some start-ups are also found independently without third party investment, which is known as bootstrapping. This is rare and can only be found in sceanrios where the entrepreneur has strong existing capital and monetary backing. In the recent times, the market and environment for entreprenuiral finance has changed and new modes of financing have developed which mainly include characteristics of debt as well as equity, making the instrument beneficial for the entrepreneur in totality.
The equity holder makes an equity investment and participates in the business risk and decisions of the corporation, whilst the debt holder is an investor that lends money to the corporation but does not participate in the business risk and decisions. Unlike equity investors, debt holders do not have any voting rights. The legal classification as debt or equity depends on the rights and obligations that are associated with the financial position that the investor obtains in the company. Whereas debt establishes a creditor-debtor relationship, equity investments establish a shareholder relationship between the company and the investor. The compensation for equity financing is dividend and that of debt financing is interest. While procuring debt such as secured bank loans, the start-up firm needs to furnish security or a collateral against which the loan can be granted. However, no such collateral is required in the case of equity financing. Further, in the case of debt, the creditor has priority over investors of equity in the event of insolvency of the business, while claiming the company’s assets.
3. Tax Implications of debt and equity
In 1988, R. Masulis argued that tax considerations are a primary force influencing capital structure decisions. Corporate income tax being a recurring cost for all businesses, tax strategies play a significant role in entrepreneurship. High taxes discourage some investments, while tax incentives encourage others. With respect to spurring start-ups and youth companies, R&D credit system is a popular tax incentive scheme provided by many tax jurisdictions for the purpose of boosting innovation and improving access to finance. Governments also provide tax relief via tax holidays, tax sparing credits, depreciation allocance and entrepreneurship allowance (for example: ondernemersaftrek in The Netherlands). Loss carrybacks and carryforward provisions can prove to be very advantageous for start-up firms since they can be offset against past or future profits. However, start-up firms need to wait until their venture turns profitable to be able to benefit from such loss relief measures.
The starting point for the tax classification of financial instruments as debt or equity generally flows from the commercial or civil law characteristics and qualifications. However, there can be deviations. The choice between debt and equity instruments for financing has a profound impact on the tax implications on business and vice-versa, primarily in the areas of deduction, withholding tax, participation exemption or transactional taxes, since the two have contrasting tax treatments. A certain favourable treatment is granted to debt instruments for fiscal purposes. This is because interest on debt is generally a deductible expense whilst dividends or equity returns are generally non-deductible in the hands of the corporation. The traditional reasoning behind this discrimination was that dividends were merely seen as remuneration against contributed capital whereas interest payments were seen as business costs. The tax treatment of dividends differs from that of interest in the following ways–
- Personal income taxation often provides for an effective tax rate on dividends higher than on interest.
- Profit withholding by a corporation postpones the dividend taxation but not that on interest payments.
- Particular exemptions and allowances are regularly only granted to dividends but not to interest (or vice-versa)
- A specific flow is characterized as dividend in one country and as interest in the other country.
However, in recent times, there seems to be no rationale behind such tax distortion since they are both modes of financing, business contributions or investments having equal number of administrative complexities.
The favourable tax regime towards debt provides an incentive to entrepreneurs to finance the start-up with debt rather than equity. The tax effect of deductibility of interest expenses can be used as a tool for tax avoidance through decreased reported profits or use of hybrid financial instruments. In order to blend respective advantageous characteristics of debt and equity, firms have started issuing hybrid instruments like convertible bonds, which in turn could lead to classification disputes and hybrid mismatches between two or more tax jurisdictions, possibly leading to base erosion or double taxation. These instruments qualify as debt to attain the tax benefit of interest deduction but have features of equity as well, thereby lowering the risk and leverage of the firm. Interestingly, such hybrid instruments like interest free loans can also be subject to illegal state aid investigation by the European Commission. Further, economic literature provides that tax advantages attached to debt could lead to profit-shifting activities. If debt is shifted to high tax countries, corporates can deduct interest payments against a higher marginal tax rate while the interest income received by the affiliated enterprise in the low tax jurisdiction is taxed at a lower rate. In many countries, using excessive debt purely for tax benefits is countered by implementing thin capitalization rules (for example: earning stripping rules). Additionally, in countries like Belgium and Estonia, an allowance for corporate equity (ACE) and comprehensive business income tax (CBIT) are implemented which mitigate the discrimination between the two forms of financing. From a tax point of view, these reformative systems ensure financing neutrality and improve welfare.
The interest tax shield allows firms to repay investors and reduce their corporate tax liability. While firms should use leverage to shield their income from taxes, how much of their income should they shield? If leverage is too high, there is an increased risk that a firm may not be able to meet its debt obligations and will be forced to default. While the risk of default is not by itself a problem, financial distress may lead to other consequences that reduce the value of the firm. Firms must, therefore, balance the tax benefits of debt against the cost of financial distress.
For most start-ups, interest deductions relating to debt may not be a decisive factor as much as for established firms since they generate little or no revenue in the first year of operation. Hence, solely tax-motivated strategies may not be very useful while financing a start-up. Nevertheless, the cost of capital of either of the forms of financing shall include tax-related costs. In 1984, Auerbach analyzed the effect of taxation on the cost of capital. He argued that during the history of the U.S. tax system, the cost of financing new investment by debt has been less than that of financing it by equity.  As discussed by E. Norton, smaller firms are expected to be less profitable and therefore, have less usage of debt-related tax shields than large firms. The same finding does logically apply to small scale entrepreneurs attempting to find capital for their start-up.
4. Economic Perspective of Debt and Equity
From the point of economic neutrality, it may be said that debt and equity are functionally equivalent as both are mere forms of investments and financing, thereby lacking substantial economic differences. As a means of financing business, both means of investments serve the principal purpose of funding business operations, with varying contractual degrees of risks and rewards.
In a complete and perfect capital market, the firm’s market value is independent of its’ capital structure. Franco Modigliani and Merton Miller introduced this economic theory named MM 1 in 1958, the result of which asserts that in an idealized world without taxes, the value of a firm is independent of its’ debt-equity mix, i.e. there is no optimal capital structure. This is also known as the irrelevance principle, which is only applicable and relevant in a frictionless market. It is wholly based upon idealistic and unrealistic assumptions that may not have any significance today. In the practical world, various market imperfections are present. Factors which influence the debt-equity mix include bankruptcy costs, personal income taxes and differential taxation of income from different sources, for example, capital gains versus income or dividends, differences in information among corporate insiders and investors, and issues related to control and dilution and possible differences in objectives between managers and shareholders.
From a purely economic angle, the following three determinants can help an entrepreneur choose between debt and equity –
4.1 Cost of financing
The cost of financing capital forms the key element in choosing between debt and equity. This choice is not only influenced by the prices of various financial instruments but also the relevant tax codes in the country of operation.
As theories based on perfect markets are unable to provide satisfactory explanations, it is the imperfections in the market that are more important. In 1973, Kraus and Litzenburg formulated the trade-off theory in furtherance to the MM Model, whereby corporate income taxes and bankruptcy penalties were accounted for in the capital market. According to this theory, there is a trade-off between the tax advantages offered by debt financing on one hand and deadweight costs of bankruptcy and financial distress relating to debt on the other hand. An increase in the cost of financial distress leads to a lower optimal debt level for firms. Additionally, an increase in the corporate income tax rate on equity results in a higher level of optimal debt for firms. A greater potential for small business bankruptcy implies that smaller firms should use less debt than large ones. For a newly formed start-up venture, it can be said that debt financing may be favourable since the tax incentives may not be substantial.
The Pecking Order Theory by Stewart C. Myers in 1984 indicates a financial hierarchy and thereby follows the law of least effort. This theory has its’ origin in the conflict between the management and the investors. The said conflict lies in asymmetric information since the management has more information about the investments than potential investors. Asymmetric information between investors and managers may motivate the latter to alter a firm’s capital structure. According to this theory, internal capital (retained earnings) is used first as a means of financing, and when that measure is depleted, debt is issued followed by equity, which is used as a last resort. This preferential order theory clearly recognizes the costs of financial distress for a firm. Therefore, firms prefer internal to external finance since there is information asymmetry resulting in higher cost of financing from external parties. Carpenter and Peterson also concluded that equity is often referred to as more expensive than debt. However, when outside funds are required, firms prefer debt as they are the safest securities with low risk and low cost, followed by hybrid securities like convertible bonds and then equity, which brings external ownership into the picture. This theory is based on the assumption that there is no target ratio of capital structure. As per Henderson and Modigliani and Miller, the use of debt is encouraged as a mode to lower financing costs. As interest on debt is tax-deductible and equity dividends are not, a more highly leveraged capital structure may result in lower financing costs. The cost of issuing debt and equity securities is also related to firm size. In particular, small firms pay much more than large firms to issue new equity or long-term debt.
However, Frank and Goyal in 2003, concluded that this theory is not wholly applicable on smaller sized firms since there are restricted financing possibilities. For start-ups, debt financing can be a burden since it requires repayment despite having little in the way of net profits in the initial years. Moreover, if small scale entrepreneurs have not separated their personal and business credit, their personal assets may be in the line of making any default in the debt payments resulting in personal collateral damage. On the other hand, equity fundraising can soak up a lot of time and effort. Without good connections and pitching opportunities for a start-up, it can be arduous and time-consuming.
4.2 Risk exposure
The functional equivalence theory holds good between the two financing options. Businesses seek debt and equity in the same manner to realize the same end, i.e. to fund business operations. From this perspective, one can say that risk is risk and merely differs in how it is bundled or packaged. As advocated by Myers in the pecking order theory, the general rule is “issue safe securities before risky ones”. Entrepreneurs have risk preferences while seeking investment. The spectrum of risk differs in degree and in kind. Contingency risk is also a very important determining factor while choosing an appropriate financing option. Equity embraces contingency of performance, whereas debt declines contingency. Since equity funding promises higher returns, depending on the success of the business venture, the risk offered to the investor is proportional to such returns. Debt funding may not be as risky since it ensures regular payments to the creditors, irrespective of the performance of the business. It is noteworthy that neither dividend nor interest payments can escape viability risk, i.e. where the undertaking is completely wound up having zero capacity to repay any capital or meet any continuing obligations. In other words, in the event the start-up faces bankruptcy, besides the liquidation priority order, the creditors as well as the shareholders undertake equivalent viability risk.
Start-ups are specifically known for their inherent failure risk probabilities. Asymmetric information between the entrepreneurs and the investors is one of the main reasons due to which it is difficult to raise external sources of debt or equity. In the very first year of operation, such information asymmetry is at its peak owing to the absence of any history or trends of the new business, resulting in a huge amount of risk to be undertaken by the investors. Firms also have an incentive to increase leverage to exploit the tax benefits of debt. But with too much debt, they are more likely to risk default and incur financial distress costs. Interestingly, the advantage of higher risk attached to equity funding is that it has the potential to bring in far more investment than debt alone, thereby having the ability to successfully launching a start-up.
4.3 Control and ownership
The element of control dominates all financial decisions of any business. A share purchased by a shareholder represents a unit of ownership in that business whereas a creditor in principle does not receive any controlling interests in the business. Hence, equity-driven financing dilutes control since all incoming equity investors have control. Owing to the active role played by shareholders in a business, they can be said to be more optimistic than debt investors regarding the performance of the business. With debt financing, the controlling interests and decision-making powers are retained by the entrepreneur and not divided with the investors. Debt financing is favoured in case of start-up firms since existing entrepreneurs neither lose control nor share participating rights with the creditors. It also reduces the agency conflict and avoids the problem of information symmetry between entrepreneurs and potential investors. Parting with ownership and control rights is generally not desirable to entrepreneurs and that is why they prefer accepting potential risks with excessive debt financing rather than relinquishing ownership and control through higher equity financing.
According to Williamson’s transaction costs economics, governance structures can be expected to be stronger for equity issuers than for debt issuers. Equity holders rely on the board of directors and other control mechanisms to continually monitor managers, whereas debt holders generally only interfere in management’s decision of liquidating the firm. This suggests that the issuance of equity as a source of financing relies more heavily on the effectiveness of corporate governance and the successful performance of the business venture. The Control Hypothesis, which is based upon Jensen’s Agency Theory formulated is of immense importance here. The Agency Theory was designed to recognize and mitigate the conflict arising from the possible divergence of interests between shareholders (principals) and managers (agents). This theory mainly focuses on issues such as moral hazard and adverse selection. For example, during the initial funding phase, an entrepreneur may oversell his business idea to attract investment, and the potential investor may end up investing to a suboptimal level due to the lack of due diligence to check the veracity of the venture (adverse selection). However, during the operational phase of the business, the entrepreneur may be against the interest of the shareholders (moral hazard) and not be as performance-driven. Such opportunistic activities lead to uncooperative behaviour in the relationship. This theory is not very relevant to debt financing since it does not concern any due diligence or business success.
When it comes to equity financing, the biggest advantage is that there are no fixed payments to be made to the investor, which could be beneficial when a new business is not very profitable owing to various expenses. Further, for a new business, bringing in equity partners can bring along connections, expertise and divergence. It is more beneficial in the case of high growth and technology driven start-ups. Despite such strong advantages of equity financing, it may not be very suitable for small scale start-ups who are not looking to unleash control and decision-making powers since that opposes the concept of entrepreneurship and starting an independent business away from the latches of employment. Even with large scale start-ups, securing a large investment may only be possible in cases of unique businesses and if the entrepreneur has a reputation or contacts. Moreover, in both cases, the costs of financing equity may prove to be a big hit on the newly operational firm’s expenses, making it prone to financial distress. Although excessive use of debt capital may result in an increase in financial risk to default, raising equity capital would imply splitting ownership and voting control rights with other investors.
5. Other factors influencing the capital structure decision-making process
The general quality of the entrepreneurial project is considered significant, especially the presence of empirical evidence and data showing expected profitability and growth. The market in which the start-up is planning to operate in is another key factor in the decision-making process. Developed nations have more financing and hybrid options to finance small scale firms, where information diffusion is quick as compared to developing nations, which are still at a nascent stage in discovering financing options. The understanding of the market is crucial for success. The size of the investment is another important determinant, which in turn depends upon the company profile. Manufacturing or service or digital start-ups have different factors influencing the appropriate capital structure. The uniqueness of the start-up can also be resourceful. According to Cosh, venture capitalists are more likely to financing innovative, risky and growth-oriented start-ups as compared to banks. On the other hand, technologically driven firms may also face the failure to obtain equity financing owing to excessive risk. Furthermore, as advocated by Baker & Wurgler in 2002, the timing of entry of a product or service into the market is a relevant market criterion affecting the choice between debt or equity. According to Myers (1984), the asset composition of a start-up may affect its’ capital structure choice. For example, non-service firms may have an advantage in raising external capital in the form of debt, because they are more likely to have fixed assets that can be used as collateral. Further, the financing decisions shall principally depend upon long term finance or short term finance. While companies make their choice of financing instruments, empirical and theoretical evidence has shown that debt-equity mix targets are generally set in accordance with functions of company size, bankruptcy risks and asset composition.
Therefore, after clustering all the above factors, attention needs to be given to the kind of business structure and the stage of business at which the financing is required. Based on this, the pros and cons of both financing instruments can be weighed and a decision can be made accordingly.
I consider start-up firms to be significant in the growth trajectory of the global economy. There are a number of constraints that start-up firms may face during the initial financing phase. Businesses try their best to find a balance between minimizing the cost of capital and to preserve corporate control in the hands of existing shareholders. The stress on the importance of tax is invincible and any overall changes in the tax policy could cause financing decisions to shift towards debt or equity. It is clear that in order to take advantage of the tax deductibility of interest, the firm must have considerable taxable income. For start-ups, the tax incentives favouring debt may not be very relevant in the initial phases, except for the importance of special tax regimes. Moreover, start-ups may consider equity financing as =a good option in countries where alternative forms of tax systems exist that reduce the debt-equity distortion, i.e. ACE or CBIT.
I support the possibility that small scale start-ups may follow a particular financial hierarchy or the pecking order theory while deciding the capital structure. Inclusion of debt in the capital structure requires lesser administrative work and financing costs, as compared to equity. It traditionally demands lesser risk and ensures fixed repayments for the investor. Further, the trade-off theory also supports this choice for start-up firms since it balances tax shields provided by debt with the chances of financial distress in the event of excessive debt financing. With the agency theory as well, debt financing is preferable since it gets rid of all performance-related conflicts between entrepreneurs and equity investors. Hence, on applying the pecking order theory, the agency theory and the trade-off theory, I am on the view that debt financing is a better financing option for small scale or home-based start-ups in the initial funding phase. It also seems to be more favourable for new business ventures due to lower financing costs.
Having said that, the repayment obligation attached with debt funding can be a heavy one on a new business venture in its initial stage. To balance the cons related to debt financing, alternative and convertible forms of debt can be used for financing, which includes characteristics of debt as well as equity. It is also possible for start-ups to look into a wide spectrum of hybrid financing options like convertible debt, debt with warrants, or SAFE (The Simple Agreement for Future Equity); or venture debts. Convertible notes may be the fastest and the cheapest way to fundraising that are usually used by many early-staged companies. One must be cautious of hybrid instruments and tax avoidance laws.
As a plausible conclusion and subject to the nature of the start-up, I am of the opinion that equity financing may be a less lucrative option for an entrepreneur wanting to commence his business on a small scale as compared to debt. However, start-ups must set debt targets with due regard to the expected costs of bankruptcy and financial distress due to continuous cash outflow.
LIST OF REFERENCES:
- M.J. Alhabeeb; Entrepreneurial Finance: Fundamentals of Finance: Planning and Management for Small Business
- R. Masulis, The Debt/Equity Choice (1988), Ballinger Publishing: Cambridge, MA
- Working Paper N. 33 – 2012 by The European Commission; The Debt-Equity Tax Bias: Consequences and Solutions
- OECD/G20 BEPS Project, Limiting Base Erosion involving Interest Deductions and other Financial Payments Action 4 – 2015 Report
- Alan J. Auerbach, Taxation, Corporate Financial Policy and the Cost of Capital, Journal of Economic Literature Vol. XXI (September 1983) – Pg. 905-940
- Edgar Norton, Capital Structure & Small Growth Firms, The Journal of Small Business Finance 1991 (ISSN: 1057-2287)
- Franco Modigliani & Merton Miller, The Cost of Capital, Corporation Finance and the Theory of Investment, (1958) 48 Am. Econ. Rev. 261
- Alan Kraus and Robert H. Litzenberger, A State-Preference Model of Optimal Financial Leverage, The Journal of Finance, Pg. 911 to 922.
- Michael Bradley, Gregg A. Jarrell & E. Han Kim, On the existence of an Optimal Capital Structure: Theory and Evidence, The Journal of Finance Vol. XXXIX, No. 3, July 1984, Pg. 857 to 878
- Stewart C. Myers, The Capital Structure Puzzle, The Journal of Finance Vol. XXXIX July 1984, Pg. 575 to 592
- Murray Z. Frank & Vidhan K. Goyal, Testing the Pecking Order Theory of Capital Structure Journal of Financial Economics 67 (2003), Pg. 217 to 248
- Robert E. Carpenter & Bruce C. Petersen, Is the growth of small firms constrained by internal finance?, The Review of Economics and Statistics, May 2002, 84(2): Pg. 298 to 309
- Alejandro Cremades, Debt vs. Equity Financing: Pros and Cons for Entrepreneurs, Forbes Aug 19, 2018
- C. Smith, Alternative Methods for Raising Capital: Rights versus Underwritten Offerings, Journal of Financial Economics 5 December 1977, Pg. 273 to 307
- Oliver E. Williamson, Transaction-Cost Economics: The Governance of Contractual Relations, The Journal of Law and Economics, Pg. 233 to 261
- Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure, The Journal of Financial Economics 3 (1976) Pg. 305 to 360
- Purnima Rao, Satish Kumar & Vinodh Madhavan, A study on factors driving the capital structure decisions of small and medium enterprises (SMEs) in India, IIMB Management Review (2019) 31, Pg. 37 to 50
- Andy Cosh, Douglas Cumming and Alan Hughes, Outside Entrepreneurial Capital, The Economic Journal (119) October 2009; Pg. 1494 to 1533
- Baker, M., & Wurgler, J., Market timing and Capital Structure; (2002), Journal of Finance 57 (1), Pg. 1 to 32
- Abdo Riani, 11 Surprising and Insightful Statistics about Startups, Forbesdated Oct 24, 2019
- Jack D. Glen & Brian Pinto, Debt or Equity?: How firms in Developing Countries Choose, Volume 6
 11 Surprising and Insightful Statistics about Startups by Abdo Riani dated Oct 24, 2019; https://www.forbes.com/sites/abdoriani/2019/10/24/11-surprising-and-insightful-statistics-about-startups/#4678b2ae6120 accessed on 22.01.2020 at 20:49 PM
 Entrepreneurial Finance: Fundamentals of Finance: Planning and Management for Small Business by M.J. Alhabeeb – 7.1 Debt & Equity Capital – Pg. 121
 supra – Pg. 120
 The Debt/Equity Choice by R. Masulis 1988, Ballinger Publishing: Cambridge, MA
 The Debt-Equity Tax Bias: Consequences and Solutions by The European Commission (Working Paper N. 33 – 2012)
 OECD/G20 BEPS Project Limiting Base Erosion involving Interest Deductions and other Financial Payments Action 4 – 2015 Report; Pg. 15
 The Debt-Equity Tax Bias: Consequences and Solutions by The European Commission (Working Paper N. 33 – 2012)
 Taxation, Corporate Financial Policy and the Cost of Capital by Alan J. Auerbach – Journal of Economic Literature Vol. XXI (September 1983) – Pg. 905-940
 Capital Structure & Small Growth Firms by Edgar Norton – The Journal of Small Business Finance 1991 (ISSN: 1057-2287); Pg. 162
 Franco Modigliani & Merton Miller, “The Cost of Capital, Corporation Finance and the Theory of Investment” (1958) 48 Am. Econ. Rev. 261
 A State-Preference Model of Optimal Financial Leverage by Alan Kraus and Robert H. Litzenberger [The Journal of Finance; Pg. 911 to 922.
 On the existence of an Optimal Capital Structure: Theory and Evidence by Michael Bradley, Gregg A. Jarrell & E. Han Kim – The Journal of Finance Vol. XXXIX, No. 3, July 1984, Pg. 857 to 878
 Capital Structure & Small Growth Firms by Edgar Norton – The Journal of Small Business Finance 1991 (ISSN: 1057-2287); Pg. 162
 The Capital Structure Puzzle by Stewart C. Myers –The Journal of Finance Vol. XXXIX July 1984 – Pg. 575 to 592
 Is the growth of small firms constrained by internal finance? By Robert E. Carpenter & Bruce C. Petersen The Review of Economics and Statistics, May 2002, 84(2): Pg. 298 to 309
 Capital Structure & Small Growth Firms by Edgar Norton – The Journal of Small Business Finance 1991 (ISSN: 1057-2287); Pg. 168
 C. Smith. “Alternative Methods for Raising Capital: Rights versus Underwritten Offerings” – Journal of Financial Economics 5December 1977, Pg. 273-307
 Testing the Pecking Order Theory of Capital Structure by Murray Z. Frank & Vidhan K. Goyal – Journal of Financial Economics 67 (2003) Pg. 217 to 248.
 Debt vs. Equity Financing: Pros and Cons for Entrepreneurs by Alejandro Cremades – Forbes Aug 19, 2018 accessed on 15.01.2020 at https://www.forbes.com/sites/alejandrocremades/2018/08/19/debt-vs-equity-financinpros-and-cons-for-entrepreneurs/
 Transaction-Cost Economics: The Governance of Contractual Relations by Oliver E. Williamson – The Journal of Law and Economics – Pg. 233-261
 Theory of the firm: Managerial Behaviour, Agency Costs and Ownership Structure by Michael C. Jensen & William H. Meckling – The Journal of Financial Economics 3 (1976) Pg. 305 to 360
 A study on factors driving the capital structure decisions of small and medium enterprises (SMEs) in India by Purnima Rao, Satish Kumar & Vinodh Madhavan – IIMB Management Review (2019) 31, Pg. 37-50
 Outside Entrepreneurial Capital by Andy Cosh, Douglas Cumming and Alan Hughes – The Economic Journal (119) October, 2009; Pg. 1494-1533
 Baker, M., & Wurgler, J. (2002). Market timing and Capital Structure; Journal of Finance 57 (1), 1–32.
 Supra; Pg. 142
 Debt or Equity?: How firms in Developing Countries Choose, Volume 63 by Jack D. Glen & Brian Pinto; Pg 2