Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2007/21:
Liquidity Constraints and Entrepreneurial Performance
Hans K. Hvide ()
and Jarle Møen ()
Abstract: 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.
Keywords: Entrepreneurship; Household Finance; Private benefits; Start-ups; Wealth; (follow links to similar papers)
JEL-Codes: G14; L26; M13; (follow links to similar papers)
31 pages, September 21, 2007
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