Business Owners' Financial Orientation Differs from Non-Business Owners', New Research Shows

Contacts:
Rossana Weitekamp, 516-792-1462, rossana@weitekamp.com
Lacey Graverson, 816-932-1116; lgraverson@kauffman.org, Kauffman Foundation

Kauffman Foundation study suggests business owners don't view their business ventures as particularly risky, and offers direction for policy intervention

(KANSAS CITY, Mo.) Aug. 5, 2010 — Entrepreneurs are financial risk-takers, according to conventional wisdom. But a new study from the Ewing Marion Kauffman Foundation challenges that across-the-board assumption, showing that, even though business owners are more likely than non-business owners to be willing to assume above-average risk for financial gain, they generally are more conservative when it comes to saving and borrowing.

In fact, 45 percent of business owners and only 32 percent of non-business owners reported that it was important to save for retirement, and business owners are much more likely to report that they are saving for longer time horizons. These results are consistent with findings from earlier literature that business owners have higher savings rates. The analysis also found that the more years a business has existed, the higher the owner's wealth – each additional year of business ownership results in a $2,700-$3,000 increase in net worth.

Further demonstrating business owners' financial conservatism, 91 percent of business owners report shopping a moderate amount or more to find the best investment or borrowing terms, while only 82 percent of non-business owners shop as much. In terms of borrowing practices, business owners appear slightly more conservative, with 47 percent reporting that it is OK to borrow for living expenses versus 52 percent for non-business owners.

The study, Business Owners, Financial Risk, and Wealth by Tami Gurley-Calvez, is based on Federal Reserve Board Survey of Consumer Finances (SCF) data from 1989 to 2007, a dataset uniquely suited for making asset comparisons based on business ownership status. The SCF collects extensive information on household wealth, including many asset and liability categories, and generally is considered the highest-quality data for addressing household wealth and financial decisions.

The research addressed the key question of causality – whether business owners differ in their financial orientation because of the fact that they own businesses, or whether these pre-existing differences start at the household and individual levels. According to the data, business owners are just as likely as non-business owners to invest in risky financial assets.

"It appears that owners simply don't believe their business ventures are all that risky," said Robert E. Litan, vice president of research and policy at the Kauffman Foundation. "This result suggests that – as opposed to reducing other risks – the policies that will best encourage increased business ownership include those that allow entrepreneurs to determine their profitability, including increasing the transparency of the patent process and implementing less burdensome tax and regulation requirements."

Specifically, the data show:

  • Consistent with business owners' higher motivation to save for retirement, they were more likely to identify a savings horizon of five or more years. The strong emphasis on long-term retirement savings is a bit surprising, given that another recent study found that small business owners have low participation rates in traditional retirement savings plans.
  • Surprisingly, nearly the same share of business owners (69 percent) as non-business owners (73 percent) had a good idea of future income. One possible explanation for this result is that business owners have a target income, and adjust their effort and hours accordingly.
  • Consistent with the finding of longer-term investing and savings horizons, business owners reported a more precise link between the return they were seeking and the level of risk required to achieve it. This, again, suggests that policies aimed at the actual creation of a business will have more impact than policies aimed at reducing indirect financial risk.

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