Review of Financial Studies Vol. 29 No. 9 2016
Financing from Family and Friends
Abstract
Most informal finance comes from family and friends. Existing informal finance theories cannot match two characteristics of family finance: family investors may accept belowmarket or even negative returns, yet borrowers often prefer formal finance. We argue that social preferences make family finance cheap but create shadow costs that nonetheless discourage its use: Committing family funds to risky investment displaces intrafamily insurance and undermines limited liability. The same characteristics that sustain familial insurance thus render family finance a poor source of risk capital. Even when overcoming capital constraints requires social ties, intermediation and semiformalization may therefore be crucial for promoting risk taking.
- Volume
- 29
- Issue
- 9
- Pages
- 2341-2386
- Sources
- bibtex:phds-export.bib