Stock Market Wealth and Entrepreneurship

Gabriel Chodorow-Reich, Plamen Nenov, Vitor Santos and Alp Simsek

No 18394, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

JEL-codes: E22 E44 G50 L26 (search for similar items in EconPapers)
Date: 2023-08
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