The role of entrepreneurial risk in financial portfolio allocation

Entrepreneurs or small business owners are confronted by a number of risks in their business activities. Previous literature suggests that entrepreneurs balance business-related financial risk by changing their personal investment strategy to include fewer investments in risky stocks. However, existing studies cannot separate the effects of business-related financial risk from other household and individual factors that influence investment choices. A causal identification strategy is needed to provide actionable evidence regarding whether efforts to ease business-related financing limitations such as low-interest loan or venture capital programs are likely to influence entrepreneurial activity. This analysis uses instrumental variables (IV) estimation to isolate the effects of business ownership on personal finances. Results from the Survey of Consumer Finances (SCF) suggest that entrepreneurs do mitigate business-related financial risk by reducing their personal portfolio share of risky financial assets, but at only half the magnitude estimated by previous studies.