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Title:How Does Owners' Exposure to Idiosyncratic Risk Influence the Capital Structure of Private Companies? PDF Logo
Authors:Müller, Elisabeth
Issue Date:2005
Series/Report no.:ZEW Discussion Papers 05-14
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.
Subjects:entrepreneurial investment
capital structure
underdiversification
private companies
JEL:G30
G32
more recent Version:http://hdl.handle.net/10419/28611
Document Type:Working Paper
Appears in Collections:ZEW Discussion Papers
Publikationen von Forscherinnen und Forschern des ZEW

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