Abandonment of the Applicants Signal: Grades and Entrepreneurship

This paper applies signaling theory to student entrepreneurship to explain the human capital development of entrepreneurs. A formal model postulates that student-entrepreneurs are more likely to allocate time and effort to maximize productivity in self-employment instead of in generating a signal of ability to employers and graduate schools. In terms of grades, this means that entrepreneurs exhibit higher dispersion in grades as compared to their job-seeking and advanced degree-seeking peers. Using survey data combined with detailed administrative data of undergraduate students enrolled at a major Midwestern university, we find support for our model. While controlling for class difficulty and individual ability, we find that student-entrepreneurs exhibit greater within dispersion in GPA than their peers. To the extent that grades are an indicator of knowledge acquired, this research implies that the skills of student-entrepreneurs may be less specialized than indicated by prior research.