Working Paper: CEPR ID: DP18394
Authors: Gabriel Chodorow-Reich; Plamen Nenov; Vitor Santos; Alp Simsek
Abstract: We use data on stock portfolios of Norwegian households to show that stock market wealth increases entrepreneurship by relaxing financial constraints. Our research design isolates idiosyncratic variation in household-level stock market returns. An increase in stock market wealth increases the propensity to start a firm, with the response concentrated in households with moderate levels of financial wealth, for whom a 20 percent increase in wealth due to a positive stock return increases the likelihood to start a firm by about 20%, and in years when the aggregate stock market return in Norway is high. We develop a method to study the effect of wealth on firm outcomes that corrects for the bias introduced by selection into entrepreneurship. Higher wealth causally increases firm profitability, an indication that it relaxes would-be entrepreneurs’ financial constraints. Consistent with this interpretation, the pass-through from stock wealth into equity in the new firm is one-for-one.
Keywords: startups; liquidity constraints; rank preservation; selection correction
JEL Codes: E22; E44; L26; G50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stock market wealth (G19) | higher propensity to start a firm (L26) |
| Stock market wealth (G19) | initial firm size (L26) |
| Stock market wealth (G19) | profitability of new firms (M13) |
| Higher stock market wealth (G19) | alleviates financial constraints for potential entrepreneurs (M13) |
| Stock market wealth (G19) | larger firms at creation (L26) |
| Higher stock market returns (G17) | positive marginal effect on entrepreneurship (L26) |
| Increase in stock wealth (G19) | greater marginal effect for individuals with lower initial wealth (G59) |