Sticking it Out: Entrepreneurial Survival and Liquidity Constraints (original) (raw)
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The propensity to become a business owner is a non-linear function of wealth. The relationship between wealth and entry into entrepreneurship is essentially flat over the majority of the wealth distribution. It is only at the top of the wealth distribution-after the 95 th percentile-that a positive relationship can be found. Segmenting businesses into industries with high and low starting capital requirements, we find no evidence that wealth matters more for businesses requiring higher initial capital. When using inheritances as an instrument for wealth, we find that both past and future inheritances predict current business entry showing that inheritances capture more than simply liquidity. We further exploit the regional variation in house prices and find that households who lived in regions where housing prices appreciated strongly were no more likely to start a business than households in other regions.
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Lack of capital is one of the oldest explanations advanced to explain lack of firm entry, performance, and survival. In this paper, we model each of these business steps in a causal chain by testing the liquidity constraints theory. We probe the relationships between capital and firm entry, size, and survival by computing an exogenous measure of liquidity, calculating measures of human capital, and developing instruments to capture business quality. We use a database that traces the mobility of the founders across firms and matches founders with their ventures? characteristics. Our results indicate that money is important in the entrepreneurial world, but not so much as previous work has argued. We find only weak support that individuals with more earnings are more likely to attempt entrepreneurship, except in the professional industries. Founder earnings influence start-ups financial capital. Financial capital affects positively the start-up size, but the effect on survival rate is...
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The U.S. personal bankruptcy system functions as a bankruptcy system for small businesses as well as consumers, because debts of noncorporate firms are personal liabilities of the firms' owners. If the firm fails, the owner has an incentive to file for bankruptcy, since both business debts and the owner's personal debts will be discharged. In bankruptcy, the owner must give up assets above a fixed exemption level. Because exemption levels are set by the states, they vary widely. We show that higher bankruptcy exemption levels benefit potential entrepreneurs who are risk averse by providing partial wealth insurance and therefore that the probability of owning a business increases as the exemption level increases. We test this prediction and find that the probability of households owning businesses is 35 percent higher if they live in states with unlimited rather than low exemptions.
Review of Financial Studies, 2012
We use a natural experiment in Denmark to test the hypothesis that aspiring entrepreneurs face financial constraints because of low entrepreneurial quality. We identify 304 constrained entrepreneurs who start a business after receiving windfall wealth and examine the performance of these marginal entrepreneurs. We find that constrained entrepreneurs have significantly lower survival rates and lower profits when compared with a matched sample of unconstrained entrepreneurs. These results are consistent with the hypothesis that the marginal entrepreneur is of low quality. (JEL J23, L26, M13) * We thank Thea Yde Jensen and Julie Marx for excellent research assistance. We are grateful to an anonymous referee and to
The Rise of Female Entrepreneurs: New Evidence on Gender Differences in Liquidity Constraints
European Economic Review, 2016
In this paper, we study the importance of liquidity constraints for entrepreneurial activity, using previously unexplored data from the UK. Using inheritances as an instrument, IV estimates reveal that single women drive the overall relationship between personal wealth and the propensity to start a new business. Defining business ownership rather than self-employment as the entrepreneurial outcome measure is also shown to be critical. Using self-employment leads to selection bias and underestimates the impact of personal wealth. The results imply that efforts aimed at relieving the liquidity constraints of single women could help further accelerate the recent rise of female entrepreneurship.
Wealth, Industry and the Transition to Entrepreneurship
SSRN Electronic Journal, 2000
Although the debate about the effect of wealth on entrepreneurship is now almost two decades old, there is little consensus among researchers about the significance of wealth as a determinant for self-employment. We re-visit the relationship between wealth and entrepreneurship using data from the National Longitudinal Survey of Youth. Like , our results suggest the relationship between wealth and the probability of entering entrepreneurship is nonlinear. However, unlike Hurst and Lusardi, we find the probability of entrepreneurship increases at an increasing rate with wealth, starting at lower quantiles of the wealth distribution. We also observe that the aggregate relationship masks differences among entrepreneurs with respect to their industry. While high capital requirement industries and professional services display a convex relationship between wealth and the probability of self-employment, low capital requirement industries display a concave relationship. Since we find a positive relationship between wealth and the probability of entering entrepreneurship at lower quantiles of the wealth distribution, it is critical to check whether this relationship is caused by wealth endogeneity. In order to account for the possible endogeneity of wealth we instrument for wealth using changes in housing equity and the value of unexpected inheritances. The results of instrumental variable estimation reveal that there is no significant relationship between wealth and entering entrepreneurship for the full sample as well as for each of the three industries. JEL classification: E21, G11, J24