Entrepreneurs and the Choice of Limited Liability

Michael T. K. Horvath and Michael J. Woyode

Journal of Institutional and Theoretical Economics (JITE), 2005, vol. 161, issue 4, 681-707

Abstract: We investigate factors influencing the choice of liability status by the owners of start-up firms. We propose a theoretical model that encompasses risk aversion, as well as differentials across liability states in the cost of capital and tax rates, as reasons why entrepreneurs choose one liability status over another. The likelihood of observing limited liability is predicted to be concave in the project size and the financial wealth of the entrepreneur. We use a recently collected data set on German start-up firms to test the model and find strong support for the model's predictions.

JEL-codes: D21 G33 K00 L2 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (2)

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