Entrepreneur's Wealth, Firm Performance and Cost of Capital: A Bayesian Approach to the Capital Structure of Entrepreneurial Ventures

Abstract

We model theoretically the optimal capital structure of entrepreneurial firm relying on an endogenous estimation of the return requested by entrepreneurs that compensates for the risk they incur in case of bankruptcy. We estimate the probability according to the Bayesian approach. We also consider the fact that the entrepreneurs can invest additional wealth in their venture by providing personal guarantees. The implications for start-ups and established entrepreneurial firms are then examined. The model derivations and implications are robust with respect to the evidences of previous empirical research on small firms capital structure.

Keywords: SMEs, Expected Return on Equity, Entrepreneur

JEL Classification: G31, G32