Debt financing of entrepreneurial firms: evidence from the OTC market

We examine uses of debt in a large sample of entrepreneurial firms trading on the over-the-counter (OTC) market. Overall debt is a substantial source of capital, accounting for nearly 20% of total financial capital provided in our sample. Further, debt usage increases as firms develop. During the process, debt composition changes as well. We observe that positive sales and positive cash flows mark two important milestones in entrepreneurial firms’ debt financing: having positive sales broadens firms’ access to various segments of the debt market as evidenced by reduced debt specialization; and having positive cash flows deepens firms’ relations with conventional lenders, such as banks. Our study indicates that debt capital, with its diversified sources and flexible features, supplements equity in funding entrepreneurial firms’ development.