Financial Capital Theory Vs Liquidity Theory
LITERATURE REVIEW
2.1 Theoretical Framework
2.1.1 Financial Capital/Liquidity Theory
This theory suggests that people with enough financial capacity have added value in acquiring resources to efficiently exploit the entrepreneurial opportunities, and set up a firm to do so (Clausen, 2006). However, other studies challenge this theory as it is demonstrated that most founders start new ventures without much capital, and that financial capital is not considerably related to the probability of being nascent entrepreneurs (Aldrich,1999, Kim, et al., 2003, Hurst and Lusardi, 2004, Davidson and Honing, 2003).This apparent confusion is due to the fact that the line of research connected to the theory of liquidity constraints generally aims to resolve
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Since early discussions in financial theory (Walker, 1989), the traditional view of the financial life-cycle of a company has not changed significantly. The financial life-cycle model presents the movement of an outcome dimension (revenue or cash flow) subject to the firm’s development, thereby investigating a company’s financial demand and the financial sources being available to the company. The traditional model of financial life-cycle predicts that young and small firms, in the early stage of their life-cycle (start-up firms), are facing a situation of having neither a track record nor collateral assets, cash flows/revenues which are usually negative, and sales markets which are sometimes not established, especially for innovative high-tech …show more content…
Since Modigliani and Miller‟s (1958) seminal work, a vast amount of theoretical and empirical literature in the field of capital structure research has emerged. Nonetheless, recent research found indications for the superiority of the pecking order model (Shyam-Sunders and Myers, 1999; Fama and French, 2002). The existence of a pecking order among the available financial sources was observed first by Donaldson (1961) and later re-introduced as a theoretical framework by Myers (1984) and Myers and Majluf (1984). According to this model, due to information asymmetry between insiders (management or entrepreneurs) and outside financiers, firms use financial sources in the following order: initially internal funds (retained earnings or equity supply by insiders), afterwards long-term and short-term debt, and finally, if all other sources are exhausted, outside
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