Are Individuals Entering Self-Employment Overly Optimistic? An Empirical Test of Plans and Projections on Nascent Entrepreneur Expectations
Strategic Management Journal
Strat. Mgmt. J., 31: 822–840 (2010) Published online EarlyView in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.833 Received 18 January 2007; Final revision received 14 November 2009
ARE INDIVIDUALS ENTERING SELF-EMPLOYMENT OVERLY OPTIMISTIC? AN EMPIRICAL TEST OF PLANS AND PROJECTIONS ON NASCENT ENTREPRENEUR EXPECTATIONS
GAVIN CASSAR*
The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania, U.S.A.
This research examines the rationality of the expectations of nascent entrepreneurs. Consistent with conjectures regarding entry into self-employment, I find substantial overoptimism in nascent entrepreneurs’ expectations, in that they overestimate the probability that their nascent activity will result in an operating venture. Further, for those ventures that achieve operation, individuals overestimate the expected future sales and employment. To explain variations in overoptimism, I posit that those individuals who adopt an inside view to forecasting through the use of plans and financial projections, will exhibit greater ex ante bias in their expectations. Consistent with the inside view causing overoptimism in expectations, I find that the preparation of projected financial statements results in more overly optimistic venture sale forecasts. Copyright 2010 John Wiley & Sons, Ltd.
INTRODUCTION
Expectations of future returns from vocational activity underlie the choice of employment and trigger the decision to start a venture (Cassar, 2006; Shane and Venkataraman, 2000). Individuals, when choosing to invest their time and capital in nascent entrepreneurial activity, do so with an expectation of success, such as the probability of achieving an operating business. Expectations also underlie the subsequent actions of individuals through the venturing process, such as whether to continue in self-employment or how much additional time and capital to invest (Gimeno
Keywords: expectations; financial
Strat. Mgmt. J., 31: 822–840 (2010) Published online EarlyView in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.833 Received 18 January 2007; Final revision received 14 November 2009
ARE INDIVIDUALS ENTERING SELF-EMPLOYMENT OVERLY OPTIMISTIC? AN EMPIRICAL TEST OF PLANS AND PROJECTIONS ON NASCENT ENTREPRENEUR EXPECTATIONS
GAVIN CASSAR*
The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania, U.S.A.
This research examines the rationality of the expectations of nascent entrepreneurs. Consistent with conjectures regarding entry into self-employment, I find substantial overoptimism in nascent entrepreneurs’ expectations, in that they overestimate the probability that their nascent activity will result in an operating venture. Further, for those ventures that achieve operation, individuals overestimate the expected future sales and employment. To explain variations in overoptimism, I posit that those individuals who adopt an inside view to forecasting through the use of plans and financial projections, will exhibit greater ex ante bias in their expectations. Consistent with the inside view causing overoptimism in expectations, I find that the preparation of projected financial statements results in more overly optimistic venture sale forecasts. Copyright 2010 John Wiley & Sons, Ltd.
INTRODUCTION
Expectations of future returns from vocational activity underlie the choice of employment and trigger the decision to start a venture (Cassar, 2006; Shane and Venkataraman, 2000). Individuals, when choosing to invest their time and capital in nascent entrepreneurial activity, do so with an expectation of success, such as the probability of achieving an operating business. Expectations also underlie the subsequent actions of individuals through the venturing process, such as whether to continue in self-employment or how much additional time and capital to invest (Gimeno
Keywords: expectations; financial
References: Strat. Mgmt. J., 31: 822–840 (2010) DOI: 10.1002/smj ACKNOWLEDGEMENTS Strat. Mgmt. J., 31: 822–840 (2010) DOI: 10.1002/smj 840 Strat. Mgmt. J., 31: 822–840 (2010) DOI: 10.1002/smj