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Liquidity Constraints and Entrepreneurial Performance

  • Hvide, Hans K.

    ()

    (University of Aberdeen, Business School)

  • Møen, Jarle

    ()

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

If entrepreneurs are liquidity constrained and cannot borrow to operate on an efficient scale, those with more personal wealth should do better than those with less wealth. We investigate this hypothesis using a unique dataset from Norway. Consistent with liquidity constraints being present, we find a strong positive relationship between founder prior wealth and start-up size. The relationship between prior wealth and start-up performance, as measured by profitability on assets, increases for the main bulk of the wealth distribution and decreases sharply at the top. We estimate that profitability on assets increases by about 8 percentage points from the 10th to the 75th percentile of the wealth distribution. This suggests an entrepreneurial production function with a region of increasing returns. Liquidity constraints may then stop entrepreneurs from being able to exploit a "hump" in marginal productivity. From the 75th to the 99th percentile returns drops by about 10 percentage points. This suggests that an abundance of liquidity may to do more harm than good.

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File URL: http://hdl.handle.net/11250/163924
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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2007/21.

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Length: 31 pages
Date of creation: 21 Sep 2007
Date of revision:
Handle: RePEc:hhs:nhhfms:2007_021
Contact details of provider: Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspxEmail:


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  1. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1993. "Sticking it Out: Entrepreneurial Survival and Liquidity Constraints," NBER Working Papers 4494, National Bureau of Economic Research, Inc.
  2. 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.
  3. de Meza, David & Southey, Clive, 1996. "The Borrower's Curse: Optimism, Finance and Entrepreneurship," Economic Journal, Royal Economic Society, vol. 106(435), pages 375-86, March.
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  5. Gertler, M. & Gilchrist, S., 1993. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers 93-02, C.V. Starr Center for Applied Economics, New York University.
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  8. Erik Hurst & Annamaria Lusardi, 2004. "Liquidity Constraints, Household Wealth, and Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 319-347, April.
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  10. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
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  12. Scarpetta, Stefano & Fally, Thibault & Aghion, Philippe, 2007. "Credit Constraints as a Barrier to the Entry and Post-Entry Growth of Firms," Scholarly Articles 4554208, Harvard University Department of Economics.
  13. Barton H. Hamilton, 2000. "Does Entrepreneurship Pay? An Empirical Analysis of the Returns to Self-Employment," Journal of Political Economy, University of Chicago Press, vol. 108(3), pages 604-631, June.
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  16. Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 151-72, April.
  17. Landier, Augustin & Thesmar, David, 2003. "Financial Contracting with Optimistic Entrepreneurs: Theory and Evidence," CEPR Discussion Papers 3971, C.E.P.R. Discussion Papers.
  18. Anna L. Paulson & Robert M. Townsend & Alexander Karaivanov, 2006. "Distinguishing Limited Liability from Moral Hazard in a Model of Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 100-144, February.
  19. 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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