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How Does Owners? Exposure to Idiosyncratic Risk Influence the Capital Structure of Private Companies?

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Author Info
Müller, Elisabeth

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Abstract

This paper identifies the entrepreneur?s exposure to idiosyncratic risk as an important determinant of the capital structure of private companies. The exposure to idiosyncratic risk is approximated by the share of personal net worth invested in one company (SNWI). Exposure to idiosyncratic risk increases cost of equity capital since higher equity returns are required as compensation. This makes bank financing more attractive. We find that SNWI increases the demand for new bank loans whereas we cannot identify an effect on the supply. Equilibrium values of leverage increase significantly in SNWI but there is no effect on the equilibrium interest rate. --

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 05-14.

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Date of creation: 2005
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Handle: RePEc:zbw:zewdip:2904

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Related research
Keywords: entrepreneurial investment; capital structure; underdiversification; private companies;

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Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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