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Lean and Hungry or Fat and Content? Entrepreneurs' Wealth and Start-Up Performance

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Author Info

  • Hans K. Hvide

    ()
    (Business School, University of Aberdeen, Old Aberdeen AB24 3QY, Scotland)

  • Jarle Møen

    ()
    (Norwegian School of Economics and Business Administration, 5045 Bergen, Norway)

Abstract

If entrepreneurs are liquidity constrained and not able to borrow to operate on an efficient scale, economic theory predicts that entrepreneurs with more personal wealth should do better than those with less wealth. We test this hypothesis using a novel data set covering a large panel of start-ups from Norway. Consistent with liquidity constraints, we find a positive relation between founder prior wealth and start-up size. The relationship between prior wealth and start-up performance, as measured by profitability on assets, increases in the first three wealth quartiles. In the top wealth quartile, however, profitability drops sharply in wealth. Our findings are consistent with a luxury good interpretation of entrepreneurship and that higher wealth may induce a less alert or a less dedicated management. We conclude that an abundance of resources might do more harm than good for start-ups.

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File URL: http://dx.doi.org/10.1287/mnsc.1100.1177
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 56 (2010)
Issue (Month): 8 (August)
Pages: 1242-1258

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Handle: RePEc:inm:ormnsc:v:56:y:2010:i:8:p:1242-1258

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Related research

Keywords: entrepreneurial motivation; entrepreneurship; financial constraints; liquidity; organizational slack; start-ups; survival; profitability;

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Cited by:
  1. Erik Fjærli & Diana Iancu, 2012. "The financing of young firms. How persistent are borrowing constraints?," Discussion Papers 707, Research Department of Statistics Norway.
  2. Becker, Sascha & Hvide, Hans V, 2013. "Do entrepreneurs matter?," CAGE Online Working Paper Series 109, Competitive Advantage in the Global Economy (CAGE).
  3. Andersen, Steffen & Nielsen, Kasper Meisner, 2012. "Ability or Finances as Constraints on Entrepreneurship? Evidence from Survival Rates in a Natural Experiment," Working Papers 03-2012, Copenhagen Business School, Department of Economics.
  4. Hvide, Hans K. & Panos, Georgios A., 2013. "Risk Tolerance and Entrepreneurship," IZA Discussion Papers 7206, Institute for the Study of Labor (IZA).
  5. Alex Coad & Julian Frankish & Paul Nightingale & Richard G. Roberts & David J. Storey, 2012. "Business Experience and Start-up Size: Buying More Lottery Tickets Next Time Around?," SPRU Working Paper Series 203, SPRU - Science and Technology Policy Research, University of Sussex.
  6. Balasubramanyan, Lakshmi & Coulson, Edward, 2013. "Do house prices impact business starts?," Journal of Housing Economics, Elsevier, vol. 22(1), pages 36-44.
  7. repec:cge:warwcg:108 is not listed on IDEAS
  8. Dahl, Michael S. & van Praag, Mirjam & Thompson, Peter, 2014. "Entrepreneurial Couples," IZA Discussion Papers 8186, Institute for the Study of Labor (IZA).

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