Information asymmetry and capital structure in SMEs : new technology-based firms in the Irish software sector

Presented at the Global Finance Conference 2005, 27-29 June 2005, Trinity College Dublin, Dublin; the 2005 Financial Management Association annual meeting, Chicago; and the Southern Finance Association annual meetings 2005, Key WestThis paper examines the capital structure of 117 new technology-based firms in the Irish software sector. In apparent contradiction to the pecking order hypothesis (POH), most external finance is private equity, and debt is virtually absent. We argue that this is consistent with the spirit of the POH – that firms prefer sources of finance associated with the least information asymmetry. For unlisted technology firms this is private equity. Using information on founders’ perceptions gathered via survey, we confirm that software firm founders perceive greater information asymmetries in debt than in equity markets, and they agree that issuing equity sends a positive signal about the value of their firm. Founders also perceive low tax benefits of debt, and very high levels of business risk.Not applicabl