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

42 Pages Posted: 6 Jun 2011

See all articles by Steffen Andersen

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Kasper Meisner Nielsen

Copenhagen Business School - Department of Finance

Date Written: June 2011

Abstract

We exploit 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. We find that constrained entrepreneurs’ ventures have significantly lower survival rates and are less profitable than are those of unconstrained entrepreneurs. In addition, we show that windfalls have no long-term effect on survival rates of existing entrepreneurs. Collectively, these results suggest that the cause of the constraint is lower entrepreneurial ability rather than finances.

Keywords: entrepreneurship, ability, liquidity constraints, sudden death, inheritance

JEL Classification: J23, L26, M13

Suggested Citation

Andersen, Steffen and Nielsen, Kasper Meisner, Ability or Finances as Constraints to Entrepreneurship? Evidence from Survival Rates in a Natural Experiment (June 2011). Available at SSRN: https://ssrn.com/abstract=1858623 or http://dx.doi.org/10.2139/ssrn.1858623

Steffen Andersen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

London
United Kingdom

Kasper Meisner Nielsen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

A4.17 Solbjerg Plads 3
Copenhagen, Frederiksberg 2000
Denmark

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