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Is Business Formation Driven by Sentiment or Fundamentals?

Author

Listed:
  • Kim Kaivanto
  • Peng Zhang

Abstract

The creation of a new business is an act of entrepreneurship. It is also a financial undertaking. Hence it is admissible to apply the apparatus of behavioral finance to study the determinants of business formation. Our results show that aggregate business formation, nationally and regionally, is jointly predicted by economic fundamentals and sentiment. There is evidence of both 'pull' and 'push' motives for entrepreneurship. Yet this simple structure does not survive decomposition by payroll propensity. High-payroll-propensity entrepreneurs respond primarily to pull-motive fundamentals, with sentiment accounting for a small fraction of explained variance. Low-payroll-propensity entrepreneurs, on the other hand, respond to both sentiment and fundamentals, representing both pull- and push-motives, with sentiment accounting for a large fraction of explained variance. Low-payroll-propensity business formation is twice as volatile as high-payroll propensity entrepreneurship, and similarly to noise-based decision making in behavioral finance, it is substantially driven by sentiment.

Suggested Citation

  • Kim Kaivanto & Peng Zhang, 2021. "Is Business Formation Driven by Sentiment or Fundamentals?," Working Papers 332157433, Lancaster University Management School, Economics Department.
    • Handle: RePEc:lan:wpaper:332157433
    as

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    File URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2021_009.pdf
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    References listed on IDEAS

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