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

39 Pages Posted: 4 Dec 2011 Last revised: 11 Nov 2016

Andrea Moro

Cranfield University - School of Management

Sandra Nolte (Lechner)

Lancaster University Management School

Alexandra Diaz

University of Leicester

Date Written: December 10, 2014

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

Suggested Citation

Moro, Andrea and Nolte (Lechner), Sandra and Diaz, Alexandra, Entrepreneur's Wealth, Firm Performance and Cost of Capital: A Bayesian Approach to the Capital Structure of Entrepreneurial Ventures (December 10, 2014). Available at SSRN: https://ssrn.com/abstract=1967697 or http://dx.doi.org/10.2139/ssrn.1967697

Andrea Moro (Contact Author)

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

Sandra Nolte (Lechner)

Lancaster University Management School ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Alexandra Diaz

University of Leicester ( email )

University Road
Leicester, LE1 7RH
United Kingdom

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