Small firms in the SSBF

Neus Herranz, Stefan Krasa, Anne P. Villamil

Research output: Contribution to journalArticlepeer-review


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. © Springer-Verlag 2009.
Original languageEnglish
Pages (from-to)341-359
Number of pages18
JournalAnnals of Finance
Issue number3-4
Publication statusPublished - 2009


  • Entrepreneur
  • Legal Organization
  • Risk
  • Small Firms
  • SSBF


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