Stock Market Wealth and Entrepreneurship

We study how stock market wealth affects entry into entrepreneurship and the firms that entrants create. We isolate idiosyncratic variation in stock market returns using portfolio-level data from Norway. Higher stock market wealth increases the propensity to start an incorporated firm, with the response concentrated among moderate-wealth households experiencing positive idiosyncratic returns in strong market years.  For these households, a gain of 30,000 NOK (around \$4,500) raises the likelihood of starting a firm by about 16\% of the baseline rate. These results suggest that a one-standard-deviation aggregate stock market shock can move the entrepreneurship rate of moderate-wealth stockholders by roughly one-third of its standard deviation. Since higher wealth also draws in less productive entrepreneurs, simple comparisons of firms started at different wealth levels are biased. We develop a model-based selection correction and use it to estimate the causal effect of wealth on firm outcomes. Our model further shows that the effect of wealth on profits reveals whether financial constraints or non-pecuniary benefits drive the entry effect. We find that higher wealth increases firm profitability, evidence that financial constraints dominate.