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Small Business Capital Structure Choice

  • Jacques A. Schnabel

    (Wilfrid Laurier University)

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    A simple single-period model of entrepreneurial capital structure choice under conditions of informational asymmetry is developed. The uncertain terminal cash flow generated by a business venture is assumed to depend on both the amount of effort provided by the entrepreneur and the quality of the business venture. External financing induces the effort-averse entrepreneur to reduce the amount of effort he exerts. However, by astute choice of capital structure, the entrepreneur can mitigate this effect. It is shown that this entails financing high quality ventures with debt and low quality ventures with equity. This explains the predominance of debt in the capital structures of small firms.

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    File URL: http://jefsite.org/RePEc/pep/journl/jef-1992-02-1-b-schnabel.pdf
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    Article provided by Pepperdine University, Graziadio School of Business and Management in its journal Journal of Small Business Finance.

    Volume (Year): 2 (1992)
    Issue (Month): 1 (Fall)
    Pages: 13-21

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    Handle: RePEc:pep:journl:v:2:y:1992:i:1:p:13-21
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    Web page: http://bschool.pepperdine.edu/jef

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    1. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    3. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    4. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, June.
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