Personal Equity Investment and Small Business Financial Difficulties

Abstract

Theory suggests that entrepreneurs’ private information about the likelihood of the success of their enterprise is revealed by their personal equity investment in the firm. This paper tests this argument using the occurrence and severity of the first year's financial difficulties as an indication of the entrepreneur's assessment of the likelihood of the firm's success. We find support for the theory through the identification of a significant negative relation between first year financial difficulties and the percent of start-up capital represented by the entrepreneur's personal funds.