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Evidence on the Lack of Separation between Business and Personal Risks among Small Businesses

  • James S. Ang

    (Florida State University)

  • James Wuh Lin

    (Montana State University)

  • Floyd Tyler

    (Florida State University)

Registered author(s):

    Small business researchers conjecture that there is little separation between business and personal risks among small businesses. Personal assets and wealth can be subject to business risks in the form of an implicit or explicit claim depending on the organizational form and whether personal commitments are pledged by owners. The choice of organizational form can be considered a mechanism to increase the degree of separation; however, lenders' requirements for personal commitments mitigate the benefits of limited liability provisions. This paper examines the role of personal collateral and personal guarantees in augmenting implicit claims on business and personal assets with explicit claims on personal assets and personal wealth. We document the degree of non-separation of business and personal risks for 692 firms. Our results suggests that small business owners have a significant incidence of personal assets and wealth pledged for business loans, even for organizational forms such as S-corporations and C-corporations with limited legal liability. These results confirm the conjecture that there is a lack of separation between business and personal risks. The lack of separation of business and personal risks has important policy implications for the borrowing patterns and access to credit markets of small businesses.

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    File URL: http://jefsite.org/RePEc/pep/journl/jef-1995-04-2-g-ang.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): 4 (1995)
    Issue (Month): 2 (Fall)
    Pages: 197-210

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    Handle: RePEc:pep:journl:v:4:y:1995:i:2:p:197-210
    Contact details of provider: Postal: 24255 Pacific Coast Hwy, Malibu CA
    Web page: http://bschool.pepperdine.edu/jef

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    1. Scott, Jonathan A. & Smith, Terence C., 1986. "The effect of the Bankruptcy Reform Act of 1978 on small business loan pricing," Journal of Financial Economics, Elsevier, vol. 16(1), pages 119-140, May.
    2. Ben S. Bernanke & Cara S. Lown, 1991. "The Credit Crunch," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 205-248.
    3. Berger, Allen N. & Udell, Gregory F., 1990. "Collateral, loan quality and bank risk," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 21-42, January.
    4. Altman, Edward I. & Haldeman, Robert G. & Narayanan, P., 1977. "ZETATM analysis A new model to identify bankruptcy risk of corporations," Journal of Banking & Finance, Elsevier, vol. 1(1), pages 29-54, June.
    5. Leeth, John D. & Scott, Jonathan A., 1989. "The Incidence of Secured Debt: Evidence from the Small Business Community," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 379-394, September.
    6. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February.
    7. Scott, James H, Jr, 1977. "Bankruptcy, Secured Debt, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 32(1), pages 1-19, March.
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