Trading Off Business and Family Investments: Evidence from U.S. Entrepreneurial Households

Investing in children’s human capital reduces business investments for U.S. entrepreneurial households. Using financial account data of 90,000 small businesses linked to their owners and a regression discontinuity design that compares the business performance of households with college-aged dependents (18–22) to those with near-college-aged dependents (14–17), I show that business revenues and expenses decline sharply when owners’ children reach age 18. Despite the declines, profitability and productivity remain largely unaffected, suggesting a general downsizing rather than a loss in efficiency. Heterogeneity analysis shows that downsizing is concentrated among highly indebted owner households and businesses with volatile cash flows. For each dollar increase in household spending associated with a child turning 18, business expenses decline by $2.26. These findings are consistent with entrepreneurial parents reallocating capital from business investments toward their children’s human capital, as both compete for the same pool of internal family financial resources.

This paper was accepted by Camelia Kuhnen, finance.

Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2024.04789.