2016

Financing from Family and Friends

Reprint No. 2016:66

Author(s): Samuel Lee and Petra PerssonYear: 2016 Title: Review of Financial Studies Volume (No.): 29 (9) Pages: 2341–2386
Online article (restrictions may apply)
Preliminary version


Most informal finance comes from family and friends. Existing informal finance theories cannot match two characteristics of family finance: family investors may accept below-market 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.


Reference:
Lee, Samuel and Petra Persson (2016), "Financing from Family and Friends". Review of Financial Studies 29(9), 2341–2386.

Interdisciplinary European Studies

The European Union and the Return of the Nation State

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This book explores the complex and ever-changing relationship between the European Union and its member states. The recent surge in tension in this relationship has been prompted by the actions of some member state governments as they question fundamental EU values and principles and refuse to implement common decisions seemingly on the basis of narrowly defined national interests.

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