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The financing of young firms. How persistent are borrowing constraints?

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    Are investments by new firms constrained by access to financing? If so, are the constraints persistent or do firms overcome their financing problems during the first years of operation? We examine the role of capital constraints by estimating the relation between founders’ initial wealth and firm size during the first years of operation. Similar to previous studies, we find a positive impact of entrepreneurs’ wealth prior to start-up on the start-up size of entrepreneurial firms, but this effect decreases during the first five years of operation. We also document a high degree of economic mobility among entrepreneurial firms during the first years of operation. This is primarily driven by a disproportional increase in debt financing among the smallest firms, indicating that capital constraints for entrepreneurs are transitory.

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    File URL: http://www.ssb.no/a/publikasjoner/pdf/DP/dp707.pdf
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    Paper provided by Statistics Norway, Research Department in its series Discussion Papers with number 707.

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    Date of creation: Oct 2012
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    Handle: RePEc:ssb:dispap:707
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    1. Robert E. Carpenter & Bruce C. Petersen, 2002. "Is The Growth Of Small Firms Constrained By Internal Finance?," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 298-309, May.
    2. Fairlie, Robert, 2014. "The Absence of the African-American Owned Business: An Analysis of the Dynamics of Self-Employment," Santa Cruz Department of Economics, Working Paper Series qt49c4n0fg, Department of Economics, UC Santa Cruz.
    3. Cabral, Luís M B & Mata, José, 2001. "On the Evolution of the Firm Size Distribution: Facts and Theory," CEPR Discussion Papers 3045, C.E.P.R. Discussion Papers.
    4. Paolo Angelini & Andrea Generale, 2008. "On the Evolution of Firm Size Distributions," American Economic Review, American Economic Association, vol. 98(1), pages 426-38, March.
    5. repec:cup:cbooks:9780521828130 is not listed on IDEAS
    6. Quadrini, Vincenzo, 1999. "The Importance of Entrepreneurship for Wealth Concentration and Mobility," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 45(1), pages 1-19, March.
    7. Douglas Holtz-Eakin & David Joulfaian & Harvey S. Rosen, 1994. "Entrepreneurial Decisions and Liquidity Constraints," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 334-347, Summer.
    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.
    9. William M. Gentry & R. Glenn Hubbard, 2000. "Entrepreneurship and Household Saving," NBER Working Papers 7894, National Bureau of Economic Research, Inc.
    10. Hans K. Hvide & Jarle Møen, 2010. "Lean and Hungry or Fat and Content? Entrepreneurs' Wealth and Start-Up Performance," Management Science, INFORMS, vol. 56(8), pages 1242-1258, August.
    11. 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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