Financing and advising with (over)confident entrepreneurs: an experimental investigation

Nicolas Houy () and François Le Grand ()
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Nicolas Houy: Université de Lyon, Lyon, F-69007, France ; CNRS, GATE Lyon Saint-Etienne, Ecully, F-69130, France; Université Lyon 2, Lyon, F-69007, France
François Le Grand: EMLyon Business School, Écully, F-69130, France

No 1514, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: We test in the laboratory how entrepreneurs’ skill perceptions influence the design of financing and advising contracts. Our theoretical framework proposes that selfconfident entrepreneurs prefer issuing debt whereas low self-confident ones prefer equity which induces strong investor assistance. The prevalence of overconfidence makes investors more reluctant to accept debt offers and constrains self-confident entrepreneurs to finance through mixed securities. Experimental results show that self-confident entrepreneurs issue more debt-like securities and receive less assistance. We also show that entrepreneurs learn not to offer pure debt and that initial ignorance of their own skills reinforces entrepreneurs’ ability to learn through risky choices.

Keywords: Network revenue management; Monte-Carlo simulations; randomized linear programming (search for similar items in EconPapers)
JEL-codes: C44 C63 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-exp
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Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:1514

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