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Entrepreneurship and the Discipline of External Finance

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  • Ramana Nanda

    ()
    (Harvard Business School, Entrepreneurial Management Unit)

Abstract

I confirm the finding that the propensity to start a new firm rises sharply among those in the top five percentiles of personal wealth. This pattern is more pronounced for entrants in less capital intensive sectors. Prior to entry, founders in this group earn about 6% less compared to those who stay in paid employment. Their firms are more likely to fail early and conditional on survival, less likely to be make money. This pattern is only true for the most-wealthy individuals, and is attenuated for wealthy individuals starting firms in capital intensive industries. Taken together, these findings suggest that the spike in entry at the top end of the wealth distribution is driven by low-ability individuals who can afford to start (and sometimes continue running) weaker firms because they do not face the discipline of external finance.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 11-098.

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Length: 36 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:hbs:wpaper:11-098

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  1. Holtz-Eakin, Douglas & Joulfaian, David & Rosen, Harvey S, 1994. "Sticking It Out: Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 53-75, February.
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Cited by:
  1. Edward L. Glaeser & William R. Kerr & Giacomo A. M. Ponzetto, 2009. "Clusters of entrepreneurship," Economics Working Papers 1359, Department of Economics and Business, Universitat Pompeu Fabra.
  2. William Kerr & Ramana Nanda, 2006. "Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship," Harvard Business School Working Papers 07-033, Harvard Business School, revised Oct 2008.
  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. Nanda, Ramana & Rhodes-Kropf, Matthew, 2013. "Investment cycles and startup innovation," Journal of Financial Economics, Elsevier, vol. 110(2), pages 403-418.
  5. Frijters, Paul & Kong, Tao & Meng, Xin, 2011. "Migrant Entrepreneurs and Credit Constraints under Labour Market Discrimination," IZA Discussion Papers 5967, Institute for the Study of Labor (IZA).

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