Stock Market Wealth and Entrepreneurship
![This figure is a scatter plot titled "Returns on Household Stock Portfolios and Entrepreneurship" showing the relationship between stock portfolio returns and the probability of becoming an entrepreneur. The y-axis represents the change in probability of becoming an entrepreneur, ranging from -20% to 40%, with markers at 10 percentage point intervals. The x-axis represents the buy and hold return of stock portfolios, divided into six categories: [-100% to -25%], (-25% to -5%], (0% to 5%], (5% to 25%], (25% to 50%], and > 50%. The graph displays two sets of points for each category of stock returns: 1. Blue points for households with financial wealth between 50,000 and 600,000 Norwegian Krone 2. Red points for households with financial wealth between 600,000 and 5,000,000 Norwegian Krone Each point has a 95% confidence interval indicated by error bars. The graph shows a general positive trend, with higher stock portfolio returns associated with a higher probability of becoming an entrepreneur. This trend is more pronounced for households with lower financial wealth. For both wealth groups, the change is probability of entrepreneurship is near 0 for the groups that fall between a -100% and +25% return while the highest probability is associated with the highest returns (> 50%). The baseline for comparison is a stock portfolio return between -5% and 0%, as indicated in the note on the graph. The source line reads: "Source: Researchers' calculations using several administrative datasets from Norway."](/sites/default/files/inline-images/w32643_0.jpg)
In Stock Market Wealth and Entrepreneurship (NBER Working Paper 32643), Gabriel Chodorow-Reich, Plamen T. Nenov, Vitor Santos, and Alp Simsek evaluate the relationship between the performance of a household’s stock market portfolio and the likelihood that someone in that household launches an entrepreneurial venture. They analyze administrative data from Norway’s shareholder register and compute the holdings of every Norwegian household in all publicly traded companies on the Oslo stock exchange. Thirteen percent of these households are direct owners of Norwegian stocks; another 33 percent hold stocks through a domestic stock mutual fund. The database also includes information on the ownership records of privately held Norwegian firms. The researchers complement the shareholding data with information on other components of household balance sheets drawn from tax records and with demographic covariates. The data sample covers the period 2004 through 2019.
Rising financial wealth supports entrepreneurial entry by relaxing financial constraints.
The researchers define an individual as an entrepreneur if that person owns at least one-third of the book value of the stock in a nonfinancial firm with no more than three stockholders and at least one employee who is not a member of the individual’s household. An individual transitions into entrepreneurship when they are observed meeting the criteria for being an entrepreneur in one year but not in the previous one.
Favorable returns on the corporate stocks in a household’s portfolio increase the likelihood of someone in the household launching an entrepreneurial venture. A 20 percent return on the stock portfolio is associated with a 0.02 percentage point increase in the likelihood of becoming an entrepreneur. The size of the effect more than doubles when households with the highest net worth are omitted, suggesting that wealth fluctuations have a smaller effect on high than on moderate net worth households. The effect is also asymmetric: an increase in stock market wealth is associated with a jump in the probability of starting a firm, but a decline has a small and statistically insignificant negative effect.
The researchers also study the relationship between changes in stock market portfolio values, financial wealth, and entrepreneurial success, conditional on someone in the household being an entrepreneur. Unexpected increases in an individual’s stock market portfolio value are associated with stronger subsequent sales, earnings, and higher value-added. The researchers estimate that households liquidate about one-quarter of their stock market gains to fund increases in the equity in their private businesses. This expanded access to capital may enable these firms to grow.
— Laurel Britt
