Journal article
Small firms in the SSBF
Annals of finance, Vol.5(3), pp.341-359
06/2009
DOI: 10.1007/s10436-008-0118-2
Abstract
This paper uses Survey of Small Business Finance data to better understand how the owners of small firms use decisions about legal organization, firm size, capital structure, and owner investment in the firm to manage firm risk. The main findings are: Firms with unlimited liability are smaller, both when measured by assets and number of employees, and tend to be less leveraged than those whose owners limit personal exposure to firm liabilities. Entrepreneurs tend to hold largely undiversified positions by investing heavily in their firms, and this does not differ appreciably by legal organization. The percentage of firms with limited liability has remained virtually constant through time, although within this group there is a trend toward hybrid legal organizations with beneficial tax treatment. We estimate return on assets and find that entrepreneurship is a very risky undertaking, with high upside gain. The possibility of high future returns helps explain the coexistence of a large percentage of firms with negative equity and low default rates. The shape of the return distribution and limited liability interact; the option to declare bankruptcy shields owners from personal loss in the lower tail of the distribution while preserving the potential for significant firm returns in the upper tail.
Details
- Title: Subtitle
- Small firms in the SSBF
- Creators
- Neus Herranz - Department of Economics University of Illinois 1206 South 6th Street Champaign IL 61820 USAStefan Krasa - Department of Economics University of Illinois 1206 South 6th Street Champaign IL 61820 USAAnne Villamil - Department of Economics University of Illinois 1206 South 6th Street Champaign IL 61820 USA
- Contributors
- Anne P Villamil (Editor)Mariacristina De Nardi (Editor)
- Resource Type
- Journal article
- Publication Details
- Annals of finance, Vol.5(3), pp.341-359
- Publisher
- Springer-Verlag
- DOI
- 10.1007/s10436-008-0118-2
- ISSN
- 1614-2446
- eISSN
- 1614-2454
- Language
- English
- Date published
- 06/2009
- Academic Unit
- Economics
- Record Identifier
- 9984083853802771
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