In a recent paper, we argue that outside investors are cautious about financing start-ups because such companies often lack a track record and tend to be managed in a less-than professional manner, with founders sometimes putting their own interests above the company’s. We posit that investors can alleviate their fears by identifying early stage firms that have effective corporate governance already in place.

We propose that debtholders can provide a valuable signal that a company has good governance by demanding that the company be accountable to external constituents. Debt has a magnified impact on governance at entrepreneurial firms. It … Read more