Entrepreneurial Finance and Nondiversifiable Risk

By Hui Chen, Jianjun Miao, Neng Wang. 2009

130 citations recorded by the source corpus.

We develop a dynamic incomplete-markets model of entrepreneurial firms, and demonstrate the implications of nondiversifiable risks for entrepreneurs' interdependent consumption, portfolio allocation, financing, investment, and business exit decisions. We characterize the optimal capital structure via a generalized tradeoff model where risky debt provides significant diversification benefits. Nondiversifiable risks have several important implications: More risk-averse entrepreneurs default earlier, but choose higher leverage; lack of diversification causes entrepreneurial firms to underinvest relative to public firms, and risky debt partially alleviates this problem; and entrepreneurial risk aversion can overturn the risk-shifting incentives induced by risky debt. We also analytically characterize the idiosyncratic risk premium. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/a029107718bdab493f91cc624fdef963c33b198d

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In Accounting

1. Dimitris Papanikolaou
2. Vasia Panousi
3. Todd A. Gormley
4. David A. Matsa
5. Baolian Wang
6. Anup Srivastava

In Strategy and Management

1. Dimitris Papanikolaou
2. Vasia Panousi
3. Baolian Wang
4. Anup Srivastava

Citations in the corpus

• Investment, Idiosyncratic Risk, and Ownership (2011, background): “Gillan and Starks (2000) and Hartzell and Starks (2003) provide empirical evidence supporting the view that institutional ownership can lead to more effective corporate governance.”