Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk


  • John Heaton,

  • Deborah Lucas

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    • University of Chicago and the NBER, and Northwestern University and the NBER. We thank seminar participants at Carnegie Mellon, the University of Chicago, the Federal Reserve Board, Michigan State University, the University of Minnesota, MIT, the NBER Summer Institute, Northwestern University, NYU, Princeton University, UCLA, the Wharton School, and the University of Wisconsin for helpful comments. The paper has benefited from the suggestions of George Constantinides, Janice Eberly, Ravi Jagannathan, Martha Starr-McCluer, Jim Poterba, René Stulz, Stephen Zeldes, and two anonymous referees. We are grateful to Dan Feenberg and the NBER for access to and guidance on the Tax Model data, to Ilan Kremer for outstanding research assistance, and to the National Science Foundation for financial support.


Using cross-sectional data from the SCF and Tax Model, we show that entrepreneurial income risk has a significant influence on portfolio choice and asset prices. We find that households with high and variable business income hold less wealth in stocks than other similarly wealthy households, although they constitute a significant fraction of the stockholding population. Similarly for nonentrepreneurs, holding stock in the firm where one works reduces the portfolio share of other common stocks. Finally, we show that adding proprietary income to a linear asset pricing model improves its performance over a similar model that includes only wage income.