Abstract
I study the optimal portfolio choice of risk-averse entrepreneurs in a costly state verification framework. The model generates opposite responses of firm leverage and safe asset share, which are consistent with the empirical evidence. • I study the optimal portfolio choice of risk-averse entrepreneurs in a CSV framework. • Entrepreneurs hold the safe asset even though its return is below the funding cost. • Safe asset share rises with the risk of capital and the risk aversion of entrepreneurs. • Firm leverage and safe asset share move in opposite directions dynamically.
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