Template-Type: ReDIF-Paper 1.0
Author-Name: Kim Kaivanto
Author-Name-First: Kim
Author-Name-Last: Kaivanto
Author-Name: Peng Zhang
Author-Name-First: Peng
Author-Name-Last: Zhang
Title: Is Business Formation Driven by Sentiment or Fundamentals?
Abstract: 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.
Creation-Date: 2021
File-URL: http://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/LancasterWP2021_009.pdf
File-Format: application/pdf
Number: 332157433
Classification-JEL: G40, D91, L26, G17
Keywords: sentiment, entrepreneurship, business formation, push- and pull-motives, behavioral finance
Handle: RePEc:lan:wpaper:332157433