Sticking it Out : Entrepreneurial Survival and Liquidity Constraints

Investigates whether US entrepreneurs are undercapitalized and why some individuals survive as entrepreneurs while others do not. The hypothesis posited is that, if entrepreneurs are unable to borrow enough to attain their profit-maximizing levels of capital, then entrepreneurs with enough personal money available to finance their ventures will succeed more often than those who do not have similar resources. In particular, receiving an external influx of capital will affect an enterprise's success rate and performance. Data were comprised of 1981 and 1985 federal individual income tax returns from people who had received inheritances. Results indicate that the effect of an inheritance on a firm's chances of survival is noticeable: a $150,000 inheritance raises the probability a firm will survive by approximately 1.3%. Also noticeable is the substantial impact made on a firm's performance if it does survive: the same $150,000 inheritance is associated with almost a 20% increase in an enterprise's receipts. Findings also show that US entrepreneurs are undercapitalized. (SFL)