Abstract:
Several theories in economics and finance suggest that risk attitudes perform a vital role in economic choices, including being an entrepreneur and the choice of finance for businesses. However, there are a limited number of empirical tests of these theories in the African context, where majority of firms are small and medium-scale enterprises. Using the 7th round of the Ghana Living Standards Survey (GLSS 7), this study characterizes the risk attitudes of Ghanaians and also estimates the influence of risk attitudes on the choice to own a household enterprise and the choice of financing by owners of household enterprises.
Using a Probit model to investigate the relationships, the results show that a high fraction of Ghanaians are risk averse. Specifically, females, married persons, people in the poorer wealth quintiles, Muslims, craft workers and individuals from urban coastal areas have a higher likelihood of being risk averse. The study finds that risk aversion has an impact on entrepreneurship: individuals who are risk averse are 7 percentage points less likely to own household enterprises. The study also finds that risk averse business owners are 5 percentage points less likely to self-finance their businesses at the start-up stage. While risk aversion has no significant impact on using loan financing as working capital, the wealth of the enterprise owner, the age and size of the enterprise were found to be significant predictors of using loan financing as working capital. The findings from this study suggest that risk attitude plays a strong role in entrepreneurial decision. Also, as risk averse owners are dependent on external finance at the early phase of business growth, strengthening access to capital has the potential of improving entrepreneurship at the household level. The findings largely hold when Propensity Score Matching technique is employed to address potential endogeneity issues. On the whole, the paper highlights that policies that target small enterprise development should consider the important role of risk attitudes and focus on mechanisms that ease access to external finance.
