Sticking it Out: Entrepreneurial Survival and Liquidity Constraints

Abstract

We examine why some individuals survive as entrepreneurs and others do not. In addition, we analyze the growth of entrepreneurial enterprises, conditional on surviving. Our focus is on the role of access to capital-to what extent do liquidity constraints increase the likelihood of entrepreneurial failure? The empirical strategy is based on the following logic: If entrepreneurs cannot borrow to attain their profit-maximizing levels of capital, then those entrepreneurs who have substantial personal financial resources will be more successful than those who do not. The data consist of the 1981 and 1985 federal individual income tax returns of a group of people who received inheritances. These data allow us to identify those individuals who were sole proprietors in 1981, and to determine the extent to which the decision to remain a sole proprietor was influenced by the magnitude of the inheritance-induced increase in liquidity. The results are consistent with the notion that liquidity constraints exert a noticeable influence on the viability of entrepreneurial enterprises. For example, a $150,000 inheritance increases the probability that an individual will continue as a sole proprietor by 1.3 percentage points, and conditional on surviving, the receipts of the enterprise increase by almost 20 percent.

Entrepreneurship in macroeconomics

“…Especially interesting is the work of Holtz-Eakin et al (1994) and Blanchflower and Oswald (1998). They also test whether personal wealth affects the decision to become an entrepreneur but using the increase in wealth deriving from inheritance and gifts.…”

Financing, Regulatory Costs and Entrepreneurial Propensity

“…In a study on individuals who have developed business ideas but decided against launching new ventures, Van Auken (1999) found that financial constraints were the most significant obstacle standing in the way of business launch. The resources required to form a new firm are usually beyond the means of individual entrepreneurs (Bhave, 1994) and lack of funding might be a reason for nascent entrepreneurs to abandon the start-up process (Holtz-Eakin et al, 1994). As a corollary, recent studies have ascertained that lower capital requirements and better access to capital raises the likelihood of firm formation (Van Gelderen et al, 2005).…”

The financing of small entrepreneurs in Italy

“…Household labor income before the transition to entrepreneurship is also included in the estimation: this variable should control for any income effect in the occupational choice. In order to a have a proxy for entrepreneurial ability, I include the possibility of learning informal business experience from the parents (Lentz and Laband 1990;Holtz-Eakin et al 1994a;Guiso and Schivardi 2005): in detail, a dummy is equal to 1 if one of the parents was self-employed. 15 Like other control variables, I also consider several household characteristics that can influence the shape of the household utility function and the occupational choice.…”