Ability or Finances as Constraints on Entrepreneurship? Evidence from Survival Rates in a Natural Experiment

We use a natural experiment in Denmark to test the hypothesis that aspiring entrepreneurs face financial constraints because of low entrepreneurial quality. We identify 304 constrained entrepreneurs who start a business after receiving windfall wealth and examine the performance of these marginal entrepreneurs. We find that constrained entrepreneurs have significantly lower survival rates and lower profits when compared with a matched sample of unconstrained entrepreneurs. These results are consistent with the hypothesis that the marginal entrepreneur is of low quality. (JEL J23, L26, M13) *We thank Thea Yde Jensen and Julie Marx for excellent research assistance. We are grateful to an anonymous referee and to Henk Berkman, Christophe Bonnet, Martin Browning, Sudipto Dasgupta, Mette Ejnæs, Eithan Goldman, Glenn Harrison, Hans Hvide, Alexander Ljungqvist (the editor), and Chandler Lutz, as well as seminar participants and colleagues at the Academy of Entrepreneurial Finance 2011 Meeting, Deakin Finance Colloquium 2011, the European Finance Association 2011 Meeting, Hong Kong University of Science and Technology, Singapore Management University, University of Bergen, University of Copenhagen, and University of East Anglia for helpful comments and suggestions. Send correspondence to Steffen Andersen, Department of Economics, Copenhagen Business School, telephone: +45 3815 2591. Email: [email protected]. Kasper Meisner Nielsen, Department of Finance, Hong Kong University of Science and Technology, telephone: +852 2358 7683. Email: [email protected]. This work was supported by the Danish Social Science Research Council [grant number 09-065449].