Asian Science Citation Index is committed to provide an authoritative, trusted and significant information by the coverage of the most important and influential journals to meet the needs of the global scientific community.  
ASCI Database
308-Lasani Town,
Sargodha Road,
Faisalabad, Pakistan
Fax: +92-41-8815544
Contact Via Web
Suggest a Journal
Review of Financial Studies
Year: 2010  |  Volume: 23  |  Issue: 12  |  Page No.: 4348 - 4388

Entrepreneurial Finance and Nondiversifiable Risk

H Chen, J Miao and N. Wang    

Abstract:

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.

View Fulltext    |   Related Articles   |   Back
 
 
   
 
 
 
  Related Articles

No Article Found
 
 
 
Copyright   |   Desclaimer   |    Privacy Policy   |   Browsers   |   Accessibility