Entrepreneurial Finance and Non-diversifiable Risk
We develop a dynamic incomplete-markets model of entrepreneurial firms, and demonstrate the implications of nondiversifiable risks for entrepreneurs' interdependent consumption, portfolio allocation, financing, investment, and business exit decisions. We characterize the optimal capital structu...
| Main Authors: | , , |
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
| Published: |
Oxford University Press
2011
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| Online Access: | http://hdl.handle.net/1721.1/65557 https://orcid.org/0000-0001-9605-641X |
| _version_ | 1811090034129895424 |
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| author | Chen, Hui Miao, Jianjun Wang, Neng |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Chen, Hui Miao, Jianjun Wang, Neng |
| author_sort | Chen, Hui |
| collection | MIT |
| description | We develop a dynamic incomplete-markets model of entrepreneurial firms, and demonstrate the implications of nondiversifiable risks for entrepreneurs' interdependent consumption, portfolio allocation, financing, investment, and business exit decisions. We characterize the optimal capital structure via a generalized tradeoff model where risky debt provides significant diversification benefits. Nondiversifiable risks have several important implications: More risk-averse entrepreneurs default earlier, but choose higher leverage; lack of diversification causes entrepreneurial firms to underinvest relative to public firms, and risky debt partially alleviates this problem; and entrepreneurial risk aversion can overturn the risk-shifting incentives induced by risky debt. We also analytically characterize the idiosyncratic risk premium. |
| first_indexed | 2024-09-23T14:30:57Z |
| format | Article |
| id | mit-1721.1/65557 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T14:30:57Z |
| publishDate | 2011 |
| publisher | Oxford University Press |
| record_format | dspace |
| spelling | mit-1721.1/655572022-10-01T21:34:04Z Entrepreneurial Finance and Non-diversifiable Risk Chen, Hui Miao, Jianjun Wang, Neng Sloan School of Management Chen, Hui Chen, Hui Miao, Jianjun Wang, Neng We develop a dynamic incomplete-markets model of entrepreneurial firms, and demonstrate the implications of nondiversifiable risks for entrepreneurs' interdependent consumption, portfolio allocation, financing, investment, and business exit decisions. We characterize the optimal capital structure via a generalized tradeoff model where risky debt provides significant diversification benefits. Nondiversifiable risks have several important implications: More risk-averse entrepreneurs default earlier, but choose higher leverage; lack of diversification causes entrepreneurial firms to underinvest relative to public firms, and risky debt partially alleviates this problem; and entrepreneurial risk aversion can overturn the risk-shifting incentives induced by risky debt. We also analytically characterize the idiosyncratic risk premium. Research Grants Council of Hong Kong (project 643507) 2011-08-30T19:19:52Z 2011-08-30T19:19:52Z 2010-11 Article http://purl.org/eprint/type/JournalArticle 1465-7368 0893-9454 http://hdl.handle.net/1721.1/65557 Chen, H., J. Miao, and N. Wang. “Entrepreneurial Finance and Nondiversifiable Risk.” Review of Financial Studies 23.12 (2010) : 4348-4388. https://orcid.org/0000-0001-9605-641X en_US http://dx.doi.org/10.1093/rfs/hhq122 Review of Financial Studies Article is made available in accordance with the publisher's policy and may be subject to US copyright law. Please refer to the publisher's site for terms of use. application/pdf Oxford University Press Oxford Journals |
| spellingShingle | Chen, Hui Miao, Jianjun Wang, Neng Entrepreneurial Finance and Non-diversifiable Risk |
| title | Entrepreneurial Finance and Non-diversifiable Risk |
| title_full | Entrepreneurial Finance and Non-diversifiable Risk |
| title_fullStr | Entrepreneurial Finance and Non-diversifiable Risk |
| title_full_unstemmed | Entrepreneurial Finance and Non-diversifiable Risk |
| title_short | Entrepreneurial Finance and Non-diversifiable Risk |
| title_sort | entrepreneurial finance and non diversifiable risk |
| url | http://hdl.handle.net/1721.1/65557 https://orcid.org/0000-0001-9605-641X |
| work_keys_str_mv | AT chenhui entrepreneurialfinanceandnondiversifiablerisk AT miaojianjun entrepreneurialfinanceandnondiversifiablerisk AT wangneng entrepreneurialfinanceandnondiversifiablerisk |