Entrepreneurship Group Meets
December 7, 2012
Josh Lerner of Harvard Business School and Antoinette Schoar of MIT, Organizers
Teresa Fort, Dartmouth College; John Haltiwanger, University of Maryland and NBER; and Ron Jarmin and Javier Miranda, Bureau of the Census
How Firms Respond to Business Cycles: The Role of Firm Age and Firm Size
Fort, Haltiwanger, Jarmin, and Miranda combine data from the Census Bureau's Business Dynamics Statistics from 1981 to 2010 with indicators of business cycle and financial market conditions to examine the cyclical job dynamics of firms of different size and age. They exploit unique state and time variation in these data to identify the relative impact of business cycle and housing price shocks. They show that young and small businesses experienced especially large declines in net employment growth and job creation in the 2007-9 recession. They also show that these businesses experienced large increases in job destruction over the same period. Large and mature businesses also experienced substantial declines in net employment growth over this period. Since such firms account for most employment, it follows that they account for a larger share of job loss. However, the authors find that young/small businesses are more cyclically sensitive, so that the relative decline in this period is greater for young and small businesses than for large and mature businesses. Young and small businesses disproportionately contributed to the job loss over this period.
Jing Chen, Copenhagen Business School, and Peter Thompson, Emory University
New Firm Performance and the Replacement of Founder-CEOs
Chen and Thompson study some causes and consequences of founder-CEO replacements among a sample of 4,172 Danish star-tups created by single founders in 1999 and 2000. In contrast to the extant literature on VC-financed firms, in this sample replacements among firms are more likely among the worst- and best-performing firms, and replacement is not unambiguously associated with better subsequent performance. Firms that replaced the founder as CEO were much more likely to fail, but the surviving firms among them grew considerably faster. The authors also analyze subsequent earnings and occupational choices of founders who rescinded operating control of their firms. Although subsequent founder income is increasing in the performance of their firms, those that left good firms were no more likely than others to found another business. These results are consistent with the notion that founder-CEO replacement is driven in part by mismatches between business quality and founder ability.
Manuel Adelino, Duke University; Antoinette Schoar; and Felipe Severino, MIT
House Prices, Collateral and Self Employment
Adelino, Schoar, and Severino explore the role of the collateral lending channel in facilitating small business starts and self-employment during the period before the financial crisis of 2008. They document that between 2002 and 2007, areas with a bigger run up in house prices experienced a strong increase in employment in small businesses as compared to employment in large firms in the same industries. This increase in small business employment was particularly pronounced in industries that need little start-up capital and thus can more easily be financed out of increases in housing as collateral. These results highlight the importance of the collateral lending channel during the period of the house price boom in the creation of small establishments and they cast doubt on the role of aggregate demand driven by home equity-based borrowing in the net creation of establishments leading up to the crisis.
Michael Roach, Duke University, and Henry Sauermann, Georgia Institute of Technology
Founder or Joiner? The Role of Preferences and Context in Shaping Entrepreneurial Orientations
Entrepreneurial ventures rely not only on founders, but also on 'joiners' – individuals who are attracted to working in start-ups as employees but who do not want to be founders themselves. Roach and Sauermann examine the role of individual preferences and social-contextual influences in shaping founder and joiner orientations prior to the first career transition. In doing so, they consider the possibility that micro and macro factors exert not only independent influences, but also interrelate to shape different entrepreneurial orientations. Using a sample of 4,282 science and engineering Ph.D. students preparing to make their initial career transition, they find that individuals with founder and joiner orientations share similar preferences for entrepreneurial job attributes, but also differ significantly in the strength and nature of these preferences. Social-contextual influences -- such as entrepreneurial norms, mentors, and opportunities -- play different roles in shaping the two types of orientations. After accounting for individuals' pre-existing entrepreneurial orientation, the results suggest that a founder orientation is primarily associated with strong preferences for entrepreneurial job attributes, even in the absence of contextual influences. A joiner orientation, on the other hand, appears to emerge when both preferences and contextual influences are present. Moreover, social forces encouraging entrepreneurship have little association with entrepreneurial orientations when individuals lack preferences for entrepreneurial job attributes. These findings highlight the importance of distinguishing between founders and joiners as distinct entrepreneurial actors, and they contribute to the entrepreneurship literature by exploring the role – and interplay – of micro and macro factors in shaping entrepreneurial orientations.
Annamaria Conti and Jerry Thursby, Georgia Institute of Technology, and Marie Thursby, Georgia Institute of Technology and NBER
Are Patents Endogenous or Exogenous to Startup Financing?
Conti, Thursby, and Thursby study the role of patents as signals sent by technology start-ups to external investors to convey information about the quality of their inventions. They provide a theoretical model of patents as a productive signal sent by start-up founders to a continuum of external investors who differ in the amount of capital they can provide to the start-up. This allows them to examine the optimal match of different types of start-ups -- as defined by the quality of their technology -- to external investors who differ in the amount of capital they can provide. To test the model, they use a novel dataset of Israeli start-ups that received external funding during the period 1990-2011. The analysis provides strong support to the view that patents are used strategically by start-ups to attract new investors. Moreover, it provides evidence that star-tups with better technologies affiliate with investors who can add high value to the start-up.
Johan Hombert and Adrien Matray, HEC-Paris
The Real Effects of Hurting Lending Relationships: Evidence From Banking Deregulation and Innovation
Hombert and Matray examine the effect of lending relationships on innovative activities. Using banking deregulation as a shock to lending relationships, they find that when relationships are hurt: 1) the number of innovators decreases; 2) firms reallocate their projects away from R&D investment and toward investment in physical assets; 3) the share of technologically innovative industries in total value added declines. These findings and others are consistent with the hypothesis that evaluating innovative projects requires soft information produced by close relationships between lenders and borrowers. Overall, these results support the idea that the banking structure shapes comparative advantages.