TY  - JOUR
AU  - Chen,Hui
AU  - Miao,Jianjun
AU  - Wang,Neng
TI  - Entrepreneurial Finance and Non-diversifiable Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14848
PY  - 2009
Y2  - April 2009
UR  - http://www.nber.org/papers/w14848
L1  - http://www.nber.org/papers/w14848.pdf
N1  - Author contact info:
Hui Chen
MIT Sloan School of Management
77 Massachusetts Avenue, E62-637
Cambridge, MA 02139
Tel: 617/324-3896
Fax: 617/258-6855
E-Mail: huichen@mit.edu

Jianjun Miao
Department of Economics
Boston University
270 Bay State Road
Boston MA 02215
E-Mail: miaoj@bu.edu

Neng Wang
Columbia Business School
3022 Broadway, Uris Hall 812
New York, NY 10027
Tel: 212/854-3869
Fax: 212/662-8474
E-Mail: nw2128@columbia.edu
AB  - Entrepreneurs face significant non-diversifiable business risks. We build a dynamic incomplete markets model of entrepreneurial finance to demonstrate the important implications of nondiversifiable risks for entrepreneurs' interdependent consumption, portfolio allocation, financing, investment, and business exit decisions. The optimal capital structure is determined by a generalized tradeoff model where leverage via risky non-recourse debt provides significant diversification benefits. More risk-averse entrepreneurs default earlier, but also choose higher leverage, even though leverage makes his equity more risky. Non-diversified entrepreneurs demand both systematic and idiosyncratic risk premium. Cash-out option and external equity further improve diversification and raise the entrepreneur's valuation of the firm. Finally, entrepreneurial risk aversion can overturn the risk-shifting incentives induced by risky debt.
ER  -