Home Equity Finance and Entrepreneurial Performance - Evidence from a Mortgage Reform

43 Pages Posted: 7 Oct 2014 Last revised: 26 Sep 2015

See all articles by Thais Jensen

Thais Jensen

Independent

Søren Leth‐Petersen

University of Copenhagen - Department of Economics; Centre for Economic Policy Research (CEPR)

Ramana Nanda

Harvard University - Entrepreneurial Management Unit

Multiple version iconThere are 3 versions of this paper

Date Written: September 25, 2015

Abstract

We study how a mortgage reform that enabled home equity-based borrowing had an impact on entrepreneurship, using individual- and firm-level micro data from Denmark. The reform allowed entrepreneurs to bypass the project screening function of banks, by instead relying on the value of housing collateral to access credit. This enables us to study the efficacy of banks' screening technologies by examining the quality of the marginal entrants who benefited from reform. As expected, the reform relaxed constraints and led to an increase in entrepreneurship through the collateral channel. However, on average, new entrants were more likely to start businesses in sectors where they had no prior experience, were more likely to fail and had lower performance than those who did not benefit from the reform. Our results provide evidence that despite asymmetric information and opacity in startup lending, banks' screening can play an important role in credit allocation to more promising entrepreneurs. In such instances, the marginal individuals selecting into entrepreneurship when they can bypass bank screening will tend to start businesses that are of lower quality than the average existing businesses, leading to an increase in churning entry that may not translate into an equivalent increase in the overall level of entrepreneurship.

Suggested Citation

Jensen, Thais and Leth-Petersen, Soren and Nanda, Ramana, Home Equity Finance and Entrepreneurial Performance - Evidence from a Mortgage Reform (September 25, 2015). Harvard Business School Entrepreneurial Management Working Paper No. 15-020. Available at SSRN: https://ssrn.com/abstract=2506111 or http://dx.doi.org/10.2139/ssrn.2506111

Thais Jensen

Independent ( email )

No Address Available

Soren Leth-Petersen

University of Copenhagen - Department of Economics ( email )

Øster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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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