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Stock Market Wealth and Entrepreneurship

Author

Listed:
  • Chodorow-Reich, Gabriel
  • Nenov, Plamen
  • Santos, Vitor
  • Simsek, Alp

Abstract

We use data on stock portfolios of Norwegian households to show that stock market wealth increases entrepreneurship by relaxing financial constraints. Our research design isolates idiosyncratic variation in household-level stock market returns. An increase in stock market wealth increases the propensity to start a firm, with the response concentrated in households with moderate levels of financial wealth, for whom a 20 percent increase in wealth due to a positive stock return increases the likelihood to start a firm by about 20%, and in years when the aggregate stock market return in Norway is high. We develop a method to study the effect of wealth on firm outcomes that corrects for the bias introduced by selection into entrepreneurship. Higher wealth causally increases firm profitability, an indication that it relaxes would-be entrepreneurs’ financial constraints. Consistent with this interpretation, the pass-through from stock wealth into equity in the new firm is one-for-one.

Suggested Citation

  • Chodorow-Reich, Gabriel & Nenov, Plamen & Santos, Vitor & Simsek, Alp, 2023. "Stock Market Wealth and Entrepreneurship," CEPR Discussion Papers 18394, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18394
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • G50 - Financial Economics - - Household Finance - - - General

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