Does the presence of a formal business plan increase formal financial support? Empirical evidence from the PSED II on the signalling and mimetic nature of formal business planning

Abstract

In this article, we examine longitudinal data from the Panel Study of Entrepreneurial Dynamics II to infer whether formal business planning affects the amount of formal financing raised by nascent entrepreneurs. Our findings suggest that by and large the use of business plans is mimetic and reveals only limited information about the underlying entrepreneur. Yet, entrepreneurs that write formal business plan receive more formal financial support than had they not planned formally.

Keywords:

• business plan
• endogenous switching
• treatment effect
• entrepreneurship

JEL Classification:

• M1

Notes

¹ Generally, due to selection effects, one may wish to estimate a Heckman selection correction, yet such a model is not able to accommodate heterogeneous parameter estimates, there is a only a selection, and second-stage equation and second-stage parameter estimates are assumed to be homogenous. This is especially important, as marginal effects of control variables may vary across the two planning and nonplanning groups. Burke et al. (2010) provide evidence conditional on the strategic choice to plan, but do not provide counterfactual estimations on the signalling and mimetic effect given their switching model.