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Entrepreneurial Wealth and Employment: Tracing Out the Effects of a Stock Market Crash

Marius Ring

MPRA Paper from University Library of Munich, Germany

Abstract: I provide evidence that adverse shocks to the wealth of business owners during the Financial Crisis had large effects on their firms' financing, \ employment, and investment. I use individual-level portfolio data from Norway to exploit the dispersion in stock returns during 2008–09 as a source of exogenous variation in entrepreneurs' wealth. I then trace out the effects of these shocks to the entrepreneurs' privately-held firms. I find that the adverse employment and investment effects are primarily driven by young firms who—relative to mature firms—obtain considerably less bank financing following an owner wealth shock. Firms adjust employment primarily through hiring less, rather than firing, consistent with firms providing extensive-margin insurance for existing workers. These findings provide a causal link between asset price shocks and the real economy; \ and document that equity-financing frictions and the procyclicality of entrepreneurial wealth are important channels through which economic shocks amplify.

Keywords: Financial Crisis; Employment; Entrepreneurs; Equity Financing (search for similar items in EconPapers)
JEL-codes: D14 E24 G01 G32 J23 (search for similar items in EconPapers)
Date: 2019-09-15, Revised 2021-04-06
New Economics Papers: this item is included in nep-cwa, nep-ent, nep-fdg, nep-ias and nep-mac
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