Financing Constraints, Home Equity and Selection into Entrepreneurship

Søren Leth-Petersen and co-authors’ research accepted for publication in Journal Financial Economics

This paper documents the importance of access to credit when starting a new business and characterizes who benefit from it. Ramana Nanda, Thais Jensen and Søren Leth-Petersen study a Danish 1992 mortgage reform that differentially unlocked home equity across the population and examine how it impacted selection into entrepreneurship.

They find that increased entry was concentrated among entrepreneurs whose firms were founded in industries where they had no prior work experience. In addition, they find that marginal entrants benefiting from the reform had higher pre-entry earnings and that a significant share of entrants started longer-lasting firms. The results are consistent with the view that housing collateral enabled high ability individuals with less-well-established track records to overcome credit rationing and start new firms, rather than just leading to `frivolous entry' by those without prior industry experience.

You can read more in the working paper: Financing Constraints, Home Equity and Selection into Entrepreneurship