Stock market wealth and entrepreneurship
What is this research about and why did you do it?
This paper investigates the effect of stock market wealth on entrepreneurship activity, using data on stock portfolios of Norwegian households. While theory suggests that greater wealth might help overcome fixed costs of entry into business and lead to larger, more profitable firms, empirical evidence of a relationship between financial wealth and entrepreneurship remains controversial. Wealth-related individuals’ characteristics that facilitate business creation and non-random talent selection into entrepreneurship create difficulties in directly linking wealth to entry and firm-level outcomes. This research addresses these challenges and provides new insights into the relationship between wealth and entrepreneurial activity.
How did you answer this question?
To establish the effect of stock market wealth on firm creation, the study compares individuals with the same ex-ante stock portfolio characteristics, but different ex-post market returns arising from idiosyncratic holdings. To answer how additional owners’ wealth shapes the characteristics of new firms, the paper exploits a rank preservation property in a simple model of entrepreneurial choice. Administrative data from Norway on household financial wealth, portfolio allocation at the individual stock level, business ownership, and firm-level outcomes provide the empirical setting.
What did you find?
First, we document a strong positive effect of stock market wealth on entrepreneurship: overall, a 20% higher return increases entry by about 10%. This impact is heterogeneous, being null for individuals with high wealth and doubling for moderately wealthy individuals. Also, the effect concentrates in years of stock market expansion. Second, higher portfolio returns increase firm scale and profits. Third, owners increase their equity in the firm by essentially one-to-one with higher stock market wealth and finance their businesses in part through stock liquidation.
These results collectively point to the importance of financial constraints in limiting new business activity.
This figure shows the effect of stock market wealth on the propensity to start a business. The space of portfolio returns is partitioned into 7 bins, and separate results are reported for moderate wealth (left panel) and high wealth(right panel) individuals. The plots exhibit a significant positive impact on entry of having a potential return of 25% or above for the moderate wealth group, while the effects for the high wealth individuals are substantially smaller.
What implications does this have for the study (research and teaching) of wealth concentration or economic inequality?
This analysis shows how wealth inequality translates into inequality in entrepreneurial opportunities, both in terms of entry into business and firm performance. In turn, differences in access to entrepreneurship further exacerbate the initial inequality in resources, as business creation represents an important pathway to individual wealth accumulation. Our focus on stock market wealth is particularly relevant because the stock market accounts for a large share of total wealth fluctuations.
What are the next steps in your agenda?
Several further areas merit study. What can policy do to overcome the limits on entrepreneurship posed by wealth? How large is the “misallocation of talent” that results from an unequal wealth distribution? How have these constraints changed over time? How does the entrepreneurship channel change the implications of stock market and asset price fluctuations more generally for economic growth, regional economic development, and macroeconomic stabilization policies?