Dr Huamao Wang from School of Mathematics, University of Kent presented a paper “Entrepreneurial Finance with Endogenous Borrowing Constraints and Idiosyncratic Risk” at The Arne Ryde Workshop in Financial Economics, Lund University, Sweden.
The paper introduces an innovative financial contract, named equity-for-guarantee swap.
A dynamic incomplete model is built to investigate the effects of both frictions on consumption, portfolio, financing, and exit. The contract raises net profit while reduces idiosyncratic risk premium, default and cash-out probabilities, especially for lower risk aversion. It increases investment opportunity especially for higher risk aversion and higher idiosyncratic volatility.