Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2007/21: Liquidity Constraints and Entrepreneurial Performance

Hans K. Hvide () and Jarle Møen ()
Additional contact information
Hans K. Hvide: University of Aberdeen, Business School, Postal: University of Aberdeen Business School, Edward Wright Building, Dunbar Street, Old Aberdeen, AB24 3QY, United Kingdom
Jarle Møen: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

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

JEL-codes: G14; L26; M13

31 pages, September 21, 2007

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