Notice Board: Banks last resort for start-up loans

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LIMITED liability companies are more likely to obtain bank loans than sole traders or partnerships, according to a survey of business start-up financing by Warwick Business School.

The study by David Storey, of the founders of more than 150 new businesses in Cleveland, also suggested that banks are regarded as lenders of last resort. Recipients of bank loans have generally been refused finance from other sources.

Companies with limited liability status were also more likely to show stronger subsequent growth. But the most important growth factors related to the personality of the founders. Those who were middle-aged or had previous experience in the sector and had higher educational qualifications were more likely to grow faster than average.

Differentials in management pay are associated with increasing organisation hierarchy, according to a study of internal compensation plans. This suggests support for a theoretical framework known as the 'tournament model' in which managers joust to climb the corporate tree, and suggests that as they get higher they must be compensated for the reduced options to go further.

However, the study in Administrative Science Quarterly by Lambert, Larcker and Weigelt also finds support for the 'managerial power model', based on the amount of power held by the chief executive. This raises pay where the chief executive has appointed a significant proportion of external board members, but reduces it where there is a strong independent voice.

In addition, the performance of the business unit appears to affect the level of pay, the principal (or chief executive) designing a compensation package aimed at making the pay of the agent (or manager) a function of such performance measures as return on assets, in order to motivate him or her.

Not surprisingly, the survey of more than 300 US companies found that no single model explained the differentials at all levels within organisations or between them. Large companies tend to adopt accounting methods that are likely to depress profits, while companies using policies likely to flatter profits include those that operate bonus schemes based on earnings per share.

The asset structure of the company also appears to influence the choice of accounting method, according to research by Douglas Skinner, of the University of Michigan, published in the Journal of Accounting and Economics. Companies with assets-in-place (those that are operational and do not require further investment) tend to incur more debt than those with growth opportunities. Because firms with assets-in-place incur more debt, they also use more accounting-based covenants attached to debt issues - and, in order not to breach these covenants, they will be more inclined to use income-increasing accounting policies.

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