Entrepreneurial decisions with idiosyncratic risk and unknown profitability

Wenlong Zhang and Haijun Wang ()

Economic Modelling, 2021, vol. 103, issue C

Abstract: This paper develops a dynamic incomplete-markets model of an entrepreneurial firm with unknown profitability and examines how risk aversion, idiosyncratic risk, and profitability uncertainty impact the entrepreneur's consumption and portfolio choice and entrepreneurial decisions. We find that risk aversion, idiosyncratic risk, and profitability uncertainty greatly affect the entrepreneurial firm value and the chance of establishing the entrepreneurial firm. Risk aversion and idiosyncratic risk accelerate the entrepreneur's exit, while profitability uncertainty delays it. Moreover, we find that asymmetric information greatly reduces the entrepreneurial firm value and partially explains the empirical phenomenon of undervaluing an entrepreneurial firm.

Keywords: Entrepreneurial decisions; Idiosyncratic risk; Unknown profitability; Learning; Asymmetric information (search for similar items in EconPapers)
JEL-codes: D83 G11 G30 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999321002005
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:103:y:2021:i:c:s0264999321002005

DOI: 10.1016/j.econmod.2021.105611

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().