Davide Malacrino (Stanford)

“Entrepreneurs’ Wealth and Firm Dynamics”

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abstract

Owners of privately-held firms typically invest a large amount of their personal wealth into their firm. In principle, the wealth not invested in the firm may be used as a buffer to smooth shocks to the firm. Is such buffer stock behavior observed among privately-held firm owners? Does such buffer stock behavior affect the firm’s performance? To address these questions, we use matched employer-employee data, together with information on the assets held by every shareholder of every Norwegian firm from 2004 to 2013. We document three facts: (1) Wealthy entrepreneurs start larger businesses and in sectors that require high initial capital investment. (2) Entrepreneur’s private wealth improves firm performance, lowers the exit rate, and increases profitability. (3) Firms owned by wealthy shareholders are less sensitive to revenue and value added shocks in many dimensions. Specifically, at the top of the owner’s wealth distribution, survival rate, employment growth and employees’ wage growth react less to the shocks than at the bottom. We discuss a model of the firm with costly external financing that can rationalize our results.