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Risk tolerance and entrepreneurship
Institution:1. University of Bergen, Room 335, Fosswinckels gt 14, N-5007 Bergen, Norway;2. University of Stirling, Room 3B79 Cottrell Building, Stirling FK9 4LA, United Kingdom;1. Department of Banking and Finance, University of Zurich, Switzerland;2. Swiss Finance Institute (SFI), Switzerland;1. Stanford University, Graduate School of Business, United States;2. MIT Sloan School of Management, United States;3. NBER, United States;1. HEC Paris, France;2. CEPR, United Kingdom;1. Foster School of Business, University of Washington, WA 98105, United States;2. University of California – San Diego, Rady School of Management, CA 92093, United States;1. Binghamton University, United States;2. CEPR, United Kingdom;3. Loyola Marymount University, United States;4. Graduate School of Business, Stanford University, 655 Knight Way, Stanford, CA 94305, United States;5. NBER, United States;1. The Paul Merage School of Business, University of California, Irvine, CA, USA;2. Pacific Alternative Asset Management Company (PAAMCO), Irvine, CA, USA
Abstract:A theoretical tradition argues that more risk tolerant individuals are more likely to become entrepreneurs but perform worse. We test and confirm these predictions with several risk tolerance proxies. Using investment data for 400,000 individuals, we find that common stock investors are around 50% more likely to subsequently start up a firm. Firms started up by common stock investors have about 25% lower sales and 15% lower return on assets. The results are similar using personal leverage and other risk-tolerance proxies. We do not find support for alternative explanations such as unobserved wealth or behavioral effects.
Keywords:Entrepreneurial entry  Entrepreneurial performance  Risk tolerance  Risk aversion  Stock market participation
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