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Liquidity constraints and entrepreneurial performance

Hvide, Hans K.; Møen, Jarle
Working paper
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URI
http://hdl.handle.net/11250/163923
Date
2007-09
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  • Discussion papers (FOR) [514]
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.
Publisher
Norwegian School of Economics and Business Administration. Department of Finance and Management Science
Series
Discussion paper
2007:21

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