The Effects of the Qualified Small Business Stock Exemption on Entrepreneurship and Innovation

56 Pages Posted: 18 Jun 2023

See all articles by Jun Chen

Jun Chen

Renmin University of China - School of Business

Joan Farre-Mensa

University of Illinois at Chicago - Department of Finance

Date Written: June 16, 2023

Abstract

The Qualified Small Business Stock (QSBS) exemption allows certain entrepreneurs, their employees, and their investors to sell shares of their companies without paying any—or only greatly reduced—capital gains taxes. Using a diff-in-diff identification strategy, we show that the QSBS exemption increase in 2010 led to a 12% increase in firm births in industries eligible for the exemption relative to non-eligible industries. We show that the exemption's effect on entrepreneurship is concentrated in industries that have a high rate of startup exits, in high-tech industries, and in those with a high fraction of STEM employment. The exemption also led to an increase in startup employment—but only among employees with a bachelor's or higher degree. These findings suggest that the QSBS exemption spurred entrepreneurship by increasing prospective entrepreneurs' after-tax benefit of founding a successful startup and by making it easier for them to attract highly-educated talent. In addition, we show that the QSBS exemption increased startups' ability to raise their first round of venture capital. Taken together, our findings suggest that the QSBS exemption increases both the willingness of prospective entrepreneurs to become founders and their ability to raise the resources they need to be successful. Finally, we also show that the QSBS exemption led to higher patenting in treated startups, thus suggesting that it was particularly helpful to innovative startups.

Keywords: Qualified Small Business Stock, QSBS, Entrepreneurship, Hiring, Innovation, Venture Capital

JEL Classification: G21, G23, G24, K22, L26

Suggested Citation

Chen, Jun and Farre-Mensa, Joan, The Effects of the Qualified Small Business Stock Exemption on Entrepreneurship and Innovation (June 16, 2023). Available at SSRN: https://ssrn.com/abstract=4482626 or http://dx.doi.org/10.2139/ssrn.4482626

Jun Chen

Renmin University of China - School of Business ( email )

59 Zhongguancun Street, Haidian District
Beijing, 100872
China

Joan Farre-Mensa (Contact Author)

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
53
Abstract Views
203
Rank
639,925
PlumX Metrics