Finanza Imprenditoriale: Teoria del Portafoglio e Costo del Capitale

This thesis focuses on the limits that may prevent an entrepreneur from maximizing her value, and the benefits of diversification in reducing her cost of capital. After reviewing all relevant literature dealing with the differences between traditional corporate finance and entrepreneurial finance, we focus on the biases occurring when traditional finance techniques are applied to the entrepreneurial context. In particular, using the portfolio theory framework, we determine the degree of under-diversification of entrepreneurs. Borrowing the methodology developed by Kerins et al. (2004), we test a model for the cost of capital according to the firms' industry and the entrepreneur's wealth commitment to the firm. This model takes three market inputs (standard deviation of market returns, expected return of the market, and risk-free rate), and two firm-specific inputs (standard deviation of the firm returns and correlation between firm and market returns) as parameters, and returns an appropriate cost of capital as an output. We determine the expected market return and the risk-free rate according to the huge literature on the market risk premium. As for the market return volatility, it is estimated considering a GARCH specification for the market index returns. Furthermore, we assume that the firm-specific inputs can be obtained considering new-listed firms similar in risk to the firm we are evaluating. After we form a database including all the data needed for our analysis, we perform an empirical investigation to understand how much of the firm's total risk depends on market risk, and which explanatory variables can explain it. Our results show that cost of capital declines as the level of entrepreneur's commitment decreases. Therefore, maximizing the value for the entrepreneur depends on the fraction of entrepreneur's wealth invested in the firm and the fraction she sells to outside investors. These results are interesting both for entrepreneurs and policy makers: the former can benefit from an unbiased model for their valuation; the latter can obtain some guidelines to overcome the recent financial market crisis.