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

Author

Listed:
  • Thais Laerkholm Jensen

    () (University of Copenhagen)

  • Søren Leth-Petersen

    () (University of Copenhagen)

  • Ramana Nanda

    () (Harvard Business School, Entrepreneurial Management Unit)

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

  • Thais Laerkholm Jensen & Søren Leth-Petersen & Ramana Nanda, 2014. "Home Equity Finance and Entrepreneurial Performance - Evidence from a Mortgage Reform," Harvard Business School Working Papers 15-020, Harvard Business School, revised Sep 2015.
  • Handle: RePEc:hbs:wpaper:15-020
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    File URL: http://www.hbs.edu/faculty/pages/download.aspx?name=15-020.pdf
    File Function: Revised version, 2015
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    References listed on IDEAS

    as
    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.
    2. Blanchflower, David G & Oswald, Andrew J, 1998. "What Makes an Entrepreneur?," Journal of Labor Economics, University of Chicago Press, vol. 16(1), pages 26-60, January.
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    4. Adelino, Manuel & Schoar, Antoinette & Severino, Felipe, 2015. "House prices, collateral, and self-employment," Journal of Financial Economics, Elsevier, vol. 117(2), pages 288-306.
    5. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-748, August.
    6. Sandra E. Black & Philip E. Strahan, 2002. "Entrepreneurship and Bank Credit Availability," Journal of Finance, American Finance Association, vol. 57(6), pages 2807-2833, December.
    7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    8. Black, Jane & de Meza, David & Jeffreys, David, 1996. "House Price, the Supply of Collateral and the Enterprise Economy," Economic Journal, Royal Economic Society, vol. 106(434), pages 60-75, January.
    9. Lindh, Thomas & Ohlsson, Henry, 1996. "Self-Employment and Windfall Gains: Evidence from the Swedish Lottery," Economic Journal, Royal Economic Society, vol. 106(439), pages 1515-1526, November.
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    Citations

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    Cited by:

    1. Li, Jieying & Zhang, Xin, 2017. "House Prices, Home Equity, and Personal Debt Composition," Working Paper Series 343, Sveriges Riksbank (Central Bank of Sweden).
    2. Claus Thustrup Kreiner & Søren Leth-Petersen & Louise Charlotte Willerslev-Olsen, 2020. "Financial Trouble Across Generations: Evidence from the Universe of Personal Loans in Denmark," Economic Journal, Royal Economic Society, vol. 130(625), pages 233-262.
    3. Sari Kerr & William R. Kerr & Ramana Nanda, 2015. "House Prices, Home Equity and Entrepreneurship: Evidence from U.S. Census Micro Data," NBER Working Papers 21458, National Bureau of Economic Research, Inc.
    4. Sebastian Doerr, 2019. "Unintended side effects: stress tests, entrepreneurship, and innovation," BIS Working Papers 823, Bank for International Settlements.
    5. Ellis Connolly & Gianni La Cava & Matthew Read, 2015. "Housing Prices and Entrepreneurship: Evidence for the Housing Collateral Channel in Australia," RBA Annual Conference Volume (Discontinued), in: Angus Moore & John Simon (ed.),Small Business Conditions and Finance, Reserve Bank of Australia.
    6. Sari Pekkala Kerr & William R. Kerr & Ramana Nanda, 2015. "House Money and Entrepreneurship," Harvard Business School Working Papers 15-069, Harvard Business School.
    7. Harding, John P. & Rosenthal, Stuart S., 2017. "Homeownership, housing capital gains and self-employment," Journal of Urban Economics, Elsevier, vol. 99(C), pages 120-135.
    8. Philippe Bracke & Christian Hilber & Olmo Silva, 2014. "Homeownership and Entrepreneurship: The Role of Mortgage Debt and Commitment," CESifo Working Paper Series 5048, CESifo.

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