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How does owners' exposure to idiosyncratic risk influence the capital structure of private companies?

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  • Mueller, Elisabeth

Abstract

This paper identifies the owner's exposure to idiosyncratic risk as an important determinant of the demand for loans and the capital structure of private companies. The analysis is based on a sample of small and medium-sized companies from the United States. The exposure to idiosyncratic risk is approximated by the share of personal net worth invested in one company (SNWI). Exposure to idiosyncratic risk increases the cost of equity capital, since higher equity returns are required as compensation. This therefore makes bank financing more attractive. We find that SNWI increases both the demand for new bank loans and leverage substantially.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 15 (2008)
Issue (Month): 2 (March)
Pages: 185-198

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Handle: RePEc:eee:empfin:v:15:y:2008:i:2:p:185-198

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Web page: http://www.elsevier.com/locate/jempfin

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Cited by:
  1. Rashid, Abdul, 2013. "Risks and financing decisions in the energy sector: An empirical investigation using firm-level data," Energy Policy, Elsevier, vol. 59(C), pages 792-799.
  2. Julie Ann Elston & Laura Rondi, 2006. "Shareholder Protection and the Cost of Capital Empirical Evidence from German and Italian Firms," CERIS Working Paper 200608, Institute for Economic Research on Firms and Growth - Moncalieri (TO).
  3. Mustafa Caglayan & Abdul Rashid, 2013. "The Response of Firms' Leverage to Risk: Evidence from UK Public versus Non-Public ManufacturingFirms," CFI Discussion Papers 1302, Centre for Finance and Investment, Heriot Watt University.

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