Is Business Formation Driven by Sentiment or Fundamentals?

Kim Kaivanto and Peng Zhang

No 332157433, Working Papers from Lancaster University Management School, Economics Department

Abstract: The creation of a new business is an act of entrepreneurship. It is also a financial undertaking. Hence it is admissible to apply the apparatus of behavioral finance to study the determinants of business formation. Our results show that aggregate business formation, nationally and regionally, is jointly predicted by economic fundamentals and sentiment. There is evidence of both 'pull' and 'push' motives for entrepreneurship. Yet this simple structure does not survive decomposition by payroll propensity. High-payroll-propensity entrepreneurs respond primarily to pull-motive fundamentals, with sentiment accounting for a small fraction of explained variance. Low-payroll-propensity entrepreneurs, on the other hand, respond to both sentiment and fundamentals, representing both pull- and push-motives, with sentiment accounting for a large fraction of explained variance. Low-payroll-propensity business formation is twice as volatile as high-payroll propensity entrepreneurship, and similarly to noise-based decision making in behavioral finance, it is substantially driven by sentiment.

Keywords: sentiment; entrepreneurship; business formation; push- and pull-motives; behavioral finance (search for similar items in EconPapers)
JEL-codes: D91 G17 G40 L26 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ent and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.lancaster.ac.uk/media/lancaster-univers ... casterWP2021_009.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:lan:wpaper:332157433

Access Statistics for this paper

More papers in Working Papers from Lancaster University Management School, Economics Department Contact information at EDIRC.
Bibliographic data for series maintained by Giorgio Motta ().