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Evidence on the Lack of Separation between Business and Personal Risks among Small Businesses

Author

Listed:
  • James S. Ang

    (Florida State University)

  • James Wuh Lin

    (Montana State University)

  • Floyd Tyler

    (Florida State University)

Abstract

Small business researchers conjecture that there is little separation between business and personal risks among small businesses. Personal assets and wealth can be subject to business risks in the form of an implicit or explicit claim depending on the organizational form and whether personal commitments are pledged by owners. The choice of organizational form can be considered a mechanism to increase the degree of separation; however, lenders' requirements for personal commitments mitigate the benefits of limited liability provisions. This paper examines the role of personal collateral and personal guarantees in augmenting implicit claims on business and personal assets with explicit claims on personal assets and personal wealth. We document the degree of non-separation of business and personal risks for 692 firms. Our results suggests that small business owners have a significant incidence of personal assets and wealth pledged for business loans, even for organizational forms such as S-corporations and C-corporations with limited legal liability. These results confirm the conjecture that there is a lack of separation between business and personal risks. The lack of separation of business and personal risks has important policy implications for the borrowing patterns and access to credit markets of small businesses.

Suggested Citation

  • James S. Ang & James Wuh Lin & Floyd Tyler, 1995. "Evidence on the Lack of Separation between Business and Personal Risks among Small Businesses," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 4(2), pages 197-210, Fall.
    • Handle: RePEc:pep:journl:v:4:y:1995:i:2:p:197-210
    as

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    References listed on IDEAS

    as
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    3. Scott, Jonathan A. & Smith, Terence C., 1986. "The effect of the Bankruptcy Reform Act of 1978 on small business loan pricing," Journal of Financial Economics, Elsevier, vol. 16(1), pages 119-140, May.
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    More about this item

    Keywords

    Business Risk; Personal Risk; Small Business; Lack of Separation;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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