Ability or Finances as Constraints to Entrepreneurship?: Evidence from Survival Rates in a Natural Experiment

Research output: Working paperResearch

Abstract

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.
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.
LanguageEnglish
Place of PublicationColumbus
PublisherOhio State University Press
Number of pages41
StatePublished - 2011

Keywords

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

Cite this

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title = "Ability or Finances as Constraints to Entrepreneurship?: Evidence from Survival Rates in a Natural Experiment",
abstract = "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.",
keywords = "Entrepreneurship, Ability, Liquidity, Constraints, Sudden Death, Inheritance, Entrepreneurship, Ability, Liquidity, Constraints, Sudden Death, Inheritance",
author = "Steffen Andersen and {Meisner Nielsen}, Kasper",
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publisher = "Ohio State University Press",
address = "United States",
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N2 - 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.

AB - 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.

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KW - Liquidity

KW - Constraints

KW - Sudden Death

KW - Inheritance

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KW - Ability

KW - Liquidity

KW - Constraints

KW - Sudden Death

KW - Inheritance

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