Does the information content and value relevance of trade debt in early-stage firms help in raising external equity?

Abstract We assess the information content and value relevance of trade debt for external equity providers deploying the Kauffman Survey Data on early-stage firms. Our findings indicate that trade debt attracts external equity by virtue of its information content and determines its amount by virtue of its value relevance in unprofitable but growing firms. These findings remain robust after controlling for nonfinancial information on firms and their owners, macroeconomic conditions, and tests of reverse causality. The findings persist for firms that are labor-intensive, use simple technologies, and recur to high levels of trade debt. Our findings highlight critical links between debt and equity markets in early-stage firms, and the need to factor the signaling earnings potential (information content), and the relation between book and market estimates (value relevance), when it comes to assessing and valuing early-stage firms. We detail the academic, practice, and policy implications of these findings.