Final published version, 932 KB, PDF document
Research output: Working paper
Research output: Working paper
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TY - UNPB
T1 - Is Business Formation Driven by Sentiment or Fundamentals?
AU - Kaivanto, Kim
AU - Zhang, Peng
PY - 2021/7/22
Y1 - 2021/7/22
N2 - The creation of a new business is an act of entrepreneurship. It is also a financial undertaking. Hence it is admissible to apply the apparatus of behavioral finance to study the determinants of business formation. Our results show that aggregate business formation, nationally and regionally, is jointly predicted by economic fundamentals and sentiment. There is evidence of both 'pull' and 'push' motives for entrepreneurship. Yet this simple structure does not survive decomposition by payroll propensity. High-payroll-propensity entrepreneurs respond primarily to pull-motive fundamentals, with sentiment accounting for a small fraction of explained variance. Low-payroll-propensity entrepreneurs, on the other hand, respond to both sentiment and fundamentals, representing both pull- and push-motives, with sentiment accounting for a large fraction of explained variance. Low-payroll-propensity business formation is twice as volatile as high-payroll propensity entrepreneurship, and similarly to noise-based decision making in behavioral finance, it is substantially driven by sentiment.
AB - The creation of a new business is an act of entrepreneurship. It is also a financial undertaking. Hence it is admissible to apply the apparatus of behavioral finance to study the determinants of business formation. Our results show that aggregate business formation, nationally and regionally, is jointly predicted by economic fundamentals and sentiment. There is evidence of both 'pull' and 'push' motives for entrepreneurship. Yet this simple structure does not survive decomposition by payroll propensity. High-payroll-propensity entrepreneurs respond primarily to pull-motive fundamentals, with sentiment accounting for a small fraction of explained variance. Low-payroll-propensity entrepreneurs, on the other hand, respond to both sentiment and fundamentals, representing both pull- and push-motives, with sentiment accounting for a large fraction of explained variance. Low-payroll-propensity business formation is twice as volatile as high-payroll propensity entrepreneurship, and similarly to noise-based decision making in behavioral finance, it is substantially driven by sentiment.
KW - sentiment
KW - entrepreneurship
KW - business formation
KW - push- and pull-motives
KW - behavioral finance
M3 - Working paper
T3 - Economics Working Papers Series
BT - Is Business Formation Driven by Sentiment or Fundamentals?
PB - Lancaster University, Department of Economics
CY - Lancaster
ER -