Coakley et al. (2017) investigate the role of P2P (peer-to-peer) debt in the financing decisions of 1,001 unique firms that were financed by Funding Circle from 2010 to 2015. The firms are small (10-49 employees) with a median age of 11 years, virtually all are privately held, and two thirds of the debt raised has a maturity of 5 years.
The econometric results indicate that firms’ debt ratios are sensitive to P2P debt and to firm characteristics like firm size, asset tangibility and debt composition, but less sensitive to firm profitability. The larger the target leverage deviations, the higher the probability of firms issuing or having P2P debt. There is evidence that capital expansion plays an important role in explaining increases in P2P debt. The findings extend the traditional pecking order theory of capital structure as P2P debt can be considered as an additional new external debt source for private firms. They also show that, in line with the trade-off theory, UK private firms have higher leverage ratios due to the high cost of issuing equity capital. The overall conclusion is that P2P debt with a mean maturity of 4.3 years fills an important funding gap for small firms and that contributes to increased capital expenditures over the course of the immediate post-funding event years.
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