- Are business owners generally more or less financially conservative than their non-business-owning counterparts?
- Do business owners accumulate more wealth?
- Do business owners hold a smaller share of their financial assets in risky stock holdings?
The study: BUSINESS OWNERS, FINANCIAL RISK, AND WEALTH by Tami Gurley-Calvez Bureau of Business and Economic Research Department of Economics College of Business and Economics West Virginia University (July 2010 (link) Ewing Marion Kauffman Foundation)
The motivation for these questions is straightforward: “If households that own businesses are investing more heavily in relatively safe assets, then policies that reduce financial risk (such as the availability of high-yield certificate of deposit accounts) might spur business ownership among high ability households with lower risk tolerances. Alternatively, business owners may not view their ventures as risky due to asymmetric information or perceptions of their projects. In this case, policies that facilitate the ability to assess the profitability of business ownership, such as a transparent patent process and systems of regulation and taxation, would be better suited for promoting growth in business ownership.”
Results indicate that business owners are
- financially conservative based on borrowing and savings questions
- but are more likely to be willing to assume above-average risk for financial gain,
- consistent with other studies findings that entrepreneurs save more, business owners accumulate more wealth over time;
- however, business owners and non-business owners invest similar shares of their financial portfolios in safe assets.
So business owners are more risk averse in their own business ventures, but are about as risk averse in terms of their investment portfolios allocations as the rest of us.
“Taken together, the results suggest that policies aimed at increasing business ownership should focus on helping households identify high-value business opportunities through transparent tax, legal, and regulatory systems. Efforts to reduce risk should focus on the business venture, such as full loss offsets, rather than focusing on reductions in other financial risks.” (emphasis is mine).
Some interesting factoids that the study throws:
- A massive 12.26% of US households own businesses.
- Business owners are underrepresented in the lower income categories, making up about 3% and 5% of the lowest and second-lowest income quintiles, respectively.
- At the upper end of the income distribution, business owners account for 18% of households in the 80th-90th percentile range and 37% of households in the 90th-100th percentile range.
- Business owners comprise 2% of the lowest quarter of the wealth distribution and 43% of households in the 90th to 100th wealth percentile range.
But things are not changing much over time. Per authors: “These results are consistent with Gentry and Hubbard (2004) who report that entrepreneurs account for 11.5 percent of the population in 1989 using the same definition
This, however, is a function to some extent of the fact that business owners earn higher incomes and accumulate more wealth, meaning they are unlikely to stay in lower incomes/wealth percentiles even if they start from there.
“Business owners have higher mean and median income levels. The median income for business owners is $87,000, whereas the median for households not owning businesses is $42,000. Likewise, business owners have more assets and net worth overall and by income category. Business owners have a median net worth of $497,000, and non-business owners have a median net worth of $94,000. The difference is large but the ratio of median net worth for business owners to median net worth for non-business owners of 5.29 is lower than the 8.03 ratio calculated from Gentry and Hubbard (2004) using 1989 SCF data.”
So the last figure suggests that over time, the wealth gap with non-business owners is shrinking. Undoubtedly, a housing bubble helped here.