Financing Choices and Corporate Governance along the Firm's Life Cycle

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Abstract
We analyze in a two-period model whether and how financing decisions and choices of corporate governance structures in early phases of a firm's development affect their future financing and project choices. We show that high preferences for corporate control lead entrepreneurs to choose a low growth development path which mainly involves bank-financed low risk projects. Furthermore, the efficiency of active investors (venture capitalists) decisively governs firm dynamics. Mature VC markets allow firms to choose rather rapid development pathes which eventually lead them to become large and to go public early in their life time. Finally, if there are many innovative projects available (e.g. due to new technological developments or to globalization), it becomes attractive for the entrepreneurs to seek the VC's support even if these markets are less developed. This, in turn, induces growth in these markets. Thus, we are able to stress the interaction between the development of firms and the VC market, an interaction which can go in both directions.

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