Entrepreneur’s incentives for risk-taking and short-term debt

Chunpeng Lin and Jinqiang Yang

International Review of Financial Analysis, 2022, vol. 84, issue C

Abstract: We investigate the effects of short-term debt for entrepreneur’s incentives for risk-taking. To do so, we develop a model by introducing short-term debt and financing frictions into the entrepreneur framework. The more risk-averse entrepreneur overestimates the liquidity risk and undervalues the private equity, leading to higher incentives for risk-taking. Short-term debt mitigates the risk-shifting problem induced by the entrepreneur’s preference while generating additional risk-taking incentives via rollover risk. We consequently challenge the view of Seta et al. (2020) by predicting a trade-off between the two effects of short-term debt for entrepreneurs, offering a new perspective to harmonize the existing arguments.

Keywords: Short-term debt financing; Financing frictions; Entrepreneurship; Agency conflicts (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:84:y:2022:i:c:s105752192200357x

DOI: 10.1016/j.irfa.2022.102407

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