Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/28611
Authors: 
Müller, Elisabeth
Year of Publication: 
2007
Series/Report no.: 
ZEW Discussion Papers 05-14 [rev.2]
Abstract: 
This paper identifies the entrepreneur's exposure to idiosyncratic risk as an important determinant of the demand for loans and the capital structure. The analysis is based on a sample of small and medium-sized private companies from the United States. The exposure to idiosyncratic risk is approximated by the share of personal net worth invested in one company (SNWI). Exposure to idiosyncratic risk increases the cost of equity capital, since higher equity returns are required as compensation. This therefore makes bank financing more attractive. We find that SNWI increases both the demand for new bank loans and leverage substantially.
Subjects: 
capital structure
exposure to idiosyncratic risk
private companies
JEL: 
G32
G30
Document Type: 
Working Paper

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