Entrepreneurial Spirit and Entrepreneurial Finance

We introduce entrepreneurial spirit into an incomplete markets model of entrepreneurial firms and explain how it influences entrepreneurs' allocation of wealth between consumption and asset portfolios, capital structure, investment, and business exit decisions with nondiversifiable risks. The study shows that entrepreneurs with an entrepreneurial spirit prefer to choose a relatively high debt level and tend to sell their firms earlier than those without an entrepreneurial spirit, which increases the default risk and credit spreads and leads to a higher discount rate of corporate bonds. Hence, our paper provides an alternative explanation for the credit spread puzzle and firms' excessive risk management.