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How Does Owners' Exposure to Idiosyncratic Risk Influence the Capital Structure of Private Companies?

Elisabeth Müller
Authors registered in the RePEc Author Service: Elisabeth Mueller ()

No 05-14, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: This paper identifies the entrepreneur's exposure to idiosyncratic risk as an important determinant of the capital structure of private companies. The exposure to idiosyncratic risk is approximated by the share of personal net worth invested in one company (SNWI). Exposure to idiosyncratic risk increases cost of equity capital since higher equity returns are required as compensation. This makes bank financing more attractive. We find that SNWI increases the demand for new bank loans whereas we cannot identify an effect on the supply. Equilibrium values of leverage increase significantly in SNWI but there is no effect on the equilibrium interest rate.

Keywords: entrepreneurial investment; capital structure; underdiversification; private companies (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2005
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https://www.econstor.eu/bitstream/10419/24107/1/dp0514.pdf (application/pdf)

Related works:
Journal Article: How does owners' exposure to idiosyncratic risk influence the capital structure of private companies? (2008) Downloads
Working Paper: How does owners' exposure to idiosyncratic risk influence the capital structure of private companies? (2007) Downloads
Working Paper: How Does Owners' Exposure to Idiosyncratic Risk Influence the Capital Structure of Private Companies? (2006) Downloads
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