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Cost of entrepreneurial capital and under-diversification: A Euro-Mediterranean perspective

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  • Pattitoni, Pierpaolo
  • Petracci, Barbara
  • Potì, Valerio
  • Spisni, Massimo

Abstract

We assess how owner's commitment to a firm influences the firm cost of capital, and whether the relation between the former and the latter is the consequence of the owner's higher opportunity cost of capital resulting from under-diversification. Using data on private Mediterranean firms and clustering projects by country, industry, and Initial Public Offering-year, we show that the cost of capital is magnified by entrepreneur's commitment, project total risk, and correlation between project and market return.

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Bibliographic Info

Article provided by Elsevier in its journal Research in International Business and Finance.

Volume (Year): 27 (2013)
Issue (Month): 1 ()
Pages: 12-27

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Handle: RePEc:eee:riibaf:v:27:y:2013:i:1:p:12-27

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

Related research

Keywords: Opportunity cost of capital; Commitment; Small and Medium Business; Entrepreneurship;

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References

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  1. Urbonavicius, Sigitas, 2005. "ISO system implementation in small and medium companies from new EU member countries: A tool of managerial and marketing benefits development," Research in International Business and Finance, Elsevier, vol. 19(3), pages 412-426, September.
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  3. Colm Kearney & Valerio Poti, 2005. "Correlation Dynamics in European Equity Markets," Finance 0507008, EconWPA.
  4. Kerins, Frank & Smith, Janet Kiholm & Smith, Richard, 2004. "Opportunity Cost of Capital for Venture Capital Investors and Entrepreneurs," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(02), pages 385-405, June.
  5. Ahearne, Alan G. & Griever, William L. & Warnock, Francis E., 2004. "Information costs and home bias: an analysis of US holdings of foreign equities," Journal of International Economics, Elsevier, vol. 62(2), pages 313-336, March.
  6. Buchanan, Bonnie & Yang, Tina, 2005. "The benefits and costs of controlling shareholders: the rise and fall of Parmalat," Research in International Business and Finance, Elsevier, vol. 19(1), pages 27-52, March.
  7. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September.
  8. Kenneth R. French & James M. Poterba, 1991. "Investor Diversification and International Equity Markets," NBER Working Papers 3609, National Bureau of Economic Research, Inc.
  9. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
  10. Wagner, Niklas, 2004. "Time-varying moments, idiosyncratic risk, and an application to hot-issue IPO aftermarket returns," Research in International Business and Finance, Elsevier, vol. 18(1), pages 59-72, April.
  11. Gerald T. Garvey, 2001. "What is a Reasonable Rate of Return for an Undiversified Investor?," Claremont Colleges Working Papers 2001-20, Claremont Colleges.
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Cited by:
  1. Enrico Maria Cervellati & Pierpaolo Pattitoni & Marco Savioli & Rassoul Yazdipour, 2013. "Entrepreneurial Under-Diversification: Over Optimism and Overconfidence," Working Paper Series 09_13, The Rimini Centre for Economic Analysis.

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