How Do Entrepreneurs Hedge?

Abstract

The article provides an in-depth analysis of how entrepreneurs strategically construct their investment portfolios to hedge against risks associated with their business ventures. It delves into the different types of investment assets, both risky and riskless, that entrepreneurs incorporate into their portfolios. The focus is on understanding the balance between diversifying risks through a variety of investments and limiting overall risk exposure by including more stable, riskless assets. This approach aids entrepreneurs in safeguarding their personal financial status against the uncertainties inherent in their businesses. It explores two hypotheses: 'diversify risks’, where entrepreneurs invest in a variety of risky assets for risk diversification, and 'limiting risk’, where investments in riskless assets aim to reduce overall risk. The analysis addresses the endogeneity of being an entrepreneur by using parental background as an instrumental variable and finds a preference among entrepreneurs for the risk diversification approach to mitigate their business risks.

Keywords:

• Portfolio Choice of Entrepreneurs
• Stock Market Participation
• Entrepreneurs
• Hedging

JEL CLASSIFICATION:

• G02
• G11

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 See Li, Wang, and Zhou (2021) for a derivation of a simple model showing how entrepreneurship influences household portfolio allocation.

2 See, for example, Durand et al. (2008), Wang (2009), Durand et al. (2013), and Hoffman et al. (2015b).

3 See, for example, Lindquist et al. (2015), Hoffmann et al. (2015a), and Criaco et al. (2017).

4 See, for example, Weiss and Willis (1985), Ermisch and Francesconi (2001), Gennetian (2005), and Bloome (2017).

5 See, for example, Heaton and Lucas (1996, 2000), Campbell et al. (2003), Haliassos and Michaelides (2003), Cocco, Gomes, and Maenhout (2005), and Gomes and Michaelides (2005).

6 A study that illustrates the impact of parents in the decision to be entrepreneurial: https://www.businessnewsdaily.com/450-research-finds-your-parents-helped-make-you-an-entrpreneur.htm.