Keywords: financial life cycle, financial structure, micro firms, agency theory, pecking order theory, Sweden, agency costs, equity capital, retained profits, short–term debt, long–term debt
Agency costs theory and the financing life cycle empirical evidence from Swedish firm–level data
The purpose of this paper is to empirically examine the financing life cycle pattern of micro–firms in Sweden from the agency costs theory perspective. The study shows that the financing structures of firms change over the firms' life cycles. Firms generally rely on internal financial sources such as equity capital and retained profits, particularly at the start–up stage. They also use short–term debt as the second most important financial source at this stage. As firms age and develop, the use of short–term debt decreases and the use of both equity capital and long–term debt simultaneously increase. The financing patterns of firms in different industries over their life cycles follow the general pattern of the total sample. The results from the statistical tests support the applicability of the financial life cycle model and the agency costs theory to explain it.