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

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. --entrepreneurial investment,capital structure,underdiversification,private companies

Returns to private equity: idiosyncratic risk does matter!

Owners of private companies often invest a substantial share of their net worth in one company, which exposes them to idiosyncratic risk. For US companies we investigate whether owners require compensation for lack of diversification in the form of higher returns to equity. Exposure to idiosyncratic risk is measured as the share of the owner's net worth invested in the company. Equity returns are measured as the earnings rate and as capital gains. For both returns measures we find a positive and significant influence of exposure to idiosyncratic risk. This paper improves our understanding of returns to private equity. --returns to private equity,exposure to idiosyncratic risk,private companies

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

This paper identifies the entrepreneur's exposure to idiosyncratic risk as an important determinant of the demand for loans and the capital structure. The analysis is based on a sample of small and medium-sized private companies from the United States. The exposure to idiosyncratic risk is approximated by the share of personal net worth invested in one company (SNWI). Exposure to idiosyncratic risk increases the cost of equity capital, since higher equity returns are required as compensation. This therefore makes bank financing more attractive. We find that SNWI increases both the demand for new bank loans and leverage substantially. --capital structure,exposure to idiosyncratic risk,private companies

The Importance of Equity Finance for R&D Activity – Are There Differences Between Young and Old Companies?

This paper analyzes the importance of equity finance for the R&D activity of small and medium-sized enterprises. We use information on almost 6000 German SMEs from a company survey. Using the intensity of banking competition at the district level as instrument to control for endogeneity, we find that a higher equity ratio is conducive to more R&D for young but not for old companies. Equity may be a constraining factor for young companies which have to rely on the original equity investment of their owners since they have not yet accumulated retained earnings and can relay less on outside financing. The positive influence is found for R&D intensity but not for the decision whether to perform R&D. Equity financing is therefore especially important for the most innovative, young companies.R&D activity; equity finance; small and medium-sized enterprises

Managerial Ownership and Firm Performance in German Small and Medium-Sized Enterprises

This paper studies the effect of managerial ownership on performance and the determinants of managerial ownership for small and medium-sized private companies. We use a panel of around 1300 firms in the German business-related service sector for the years 1997-2000. Managerial ownership up to around 80 per cent has a positive impact on firm performance (incentive effect); for higher shares the effect becomes negative (entrenchment effect). Moreover, risk-aversion of managers and signalling of firm quality leads to a non-linear relationship between managerial ownership and the risk exposure of a firm. The determinants of performance and ownership are estimated simultaneously.corporate governance, managerial ownership, firm performance, small and medium-sized enterprises

Entrepreneurs from low-skilled immigrant groups in knowledge-intensive industries : company characteristics, survival and innovative performance

This paper analyzes how companies of immigrant entrepreneurs in knowledgeintensive industries differ from companies of native entrepreneurs with respect to start-up characteristics, firm survival and innovative performance. I focus on immigrants from the “recruitment countries” of south and southeast Europe, who arrived in Germany mainly in the 1970s to fill labor shortages. They are the largest immigrant group in Germany and can be reliably identified via ethnic name coding. Immigrant entrepreneurs are less than half as likely to found a company in a knowledge-intensive industry as native entrepreneurs. Firms owned exclusively by immigrants tend to be smaller and have higher exit rates. After controlling for resources, I found no differences in patenting activity compared to firms owned exclusively by natives. Firms in mixed immigrant/native ownership have no size disadvantage. In that group, exit rates are higher in services but not in manufacturing, and, again, there are no differences in patenting when resources are taken into account. The lower participation of immigrant entrepreneurs in knowledge-intensive industries can be explained by lower education levels, while smaller firm sizes suggest more limited access to capital

To Be Financed or Not... - The Role of Patents for Venture Capital Financing

This paper investigates how patent applications and grants held by new ventures improve their ability to attract venture capital (VC) financing. We argue that investors are faced with considerable uncertainty and therefore rely on patents as signals when trying to assess the prospects of potential portfolio companies. For a sample of VC-seeking German and British biotechnology companies we have identified all patents filed at the European Patent Office (EPO). Applying hazard rate analysis, we find that in the presence of patent applications, VC financing occurs earlier. Our results also show that VCs pay attention to patent quality, financing those ventures faster which later turn out to have high-quality patents. Patent oppositions increase the likelihood of receiving VC, but ultimate grant decisions do not spur VC financing, presumably because they are anticipated. Our empirical results and interviews with VCs suggest that the process of patenting generates signals which help to overcome the liabilities of newness faced by new ventures.patents; venture capital; intellectual property rights; R&D; biotechnology

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

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

Benefits of Control, Capital Structure and Company Growth

This paper studies the influence of the private benefits of control on the capital structure and the growth of private companies. It is argued that companies in which existing owners would lose more control if they expanded, have smaller equity increases, are more highly levered and grow more slowly. The dataset covers 8,964 private UK companies with limited liability for up to 5 years. Potential loss of control is measured as the difference in the probability of winning a vote for the largest owner before and after a hypothetical equity increase. Consistent with the private benefits of control, the results show that companies with a high potential loss of control do indeed have smaller equity increases, use more debt and grow more slowly

Stimulation of a glycosyl-phosphatidylinositol-specific phospholipase by insulin and the sulfonylurea, glimepiride, in rat adipocytes depends on increased glucose transport

Abstract. Lipoprotein lipase (LPL) and glycolipidanchored cAMP-binding ectoprotein (Gcel) are modified by glycosyl-phosphatidylinositol (GPI) in rat adipocytes, however, the linkage is potentially unstable. Incubation of the cells with either insulin (0.1-30 nM) or the sulfonylurea, glimepiride (0.5-20/zM), in the presence of glucose led to conversion of up to 35 and 20%, respectively, of the total amphiphilic LPL and Gcel to their hydrophilic versions. Inositol-phosphate was retained in the residual protein-linked anchor structure. This suggests cleavage of the GPI anchors by an endogenous GPI-specific insulin- and glimepiride-inducible phospholipase (GPI-PL). Despite cleavage, hydrophilic LPL and Creel remained membrane associated and were released only if a competitor, e.g., inositol-(cyclic)monophosphate, had been added. Other constituents of the GPI anchor (glucosamine and mannose) were less efficient. This suggests reat body of information exists regarding the structural diversity as well as the biosynthesis and posttranslational attachment of glycosyl-phosphatidylinositol (GPI) ~ structures (for recent reviews see Low, 1989; McConville et al., 1993). However, the functional significance of membrane anchorage via GPI structures versus transmembrane polypeptide domains is still a matter of debate. The accessibility of GPI molecules to cleavage by phospholipase [(G)PI-PL] opens the possibility of a regu-Address all correspondence to Dr. (;tinter Miiller, Hoechst AG Frankfurt