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This study exploits a natural experiment to investigate why financial constraints appear to limit firm formation. Exogenous variation in wealth results from unexpected inheritance due to sudden death and allows us to identify 304 constrained entrepreneurs, who start a business after receiving windfall wealth. We compare the performance of these ventures to that of a matched sample of individuals who form businesses at the same time to test whether financial barriers to entrepreneurship are caused by market failure or low entrepreneurial ability. We find that constrained entrepreneurs’ ventures have significantly lower survival rates and are less profitable than are those of unconstrained entrepreneurs. Collectively, these results suggest that constrained entrepreneurs have lower entrepreneurial ability and that capital markets work sufficiently well in funding individuals who have worthy entrepreneurial projects.

Publication information

Original languageEnglish
Place of PublicationColumbus
PublisherOhio State University
Number of pages41
StatePublished - 2011
Scopus citations

    Keywords

  • Entrepreneurship, Ability, Liquidity, Constraints, Sudden Death, Inheritance

ID: 32776140