Entrepreneurship and the Discipline of External Finance

36 Pages Posted: 27 Mar 2011  

Ramana Nanda

Harvard University - Entrepreneurial Management Unit

Date Written: March 23, 2011

Abstract

I confirm the finding that the propensity to start a new firm rises sharply among those in the top five percentiles of personal wealth. This pattern is more pronounced for entrants in less capital intensive sectors. Prior to entry, founders in this group earn about 6% less compared to those who stay in paid employment. Their firms are more likely to fail early and conditional on survival, less likely to be make money. This pattern is only true for the most-wealthy individuals, and is attenuated for wealthy individuals starting firms in capital intensive industries. Taken together, these findings suggest that the spike in entry at the top end of the wealth distribution is driven by low-ability individuals who can afford to start (and sometimes continue running) weaker firms because they do not face the discipline of external finance.

Suggested Citation

Nanda, Ramana, Entrepreneurship and the Discipline of External Finance (March 23, 2011). Harvard Business School Entrepreneurial Management Working Paper No. 11-098. Available at SSRN: https://ssrn.com/abstract=1793162 or http://dx.doi.org/10.2139/ssrn.1793162

Ramana Nanda (Contact Author)

Harvard University - Entrepreneurial Management Unit ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/rnanda

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