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Destructive Creation at Work: How Financial Distress Spurs Entrepreneurship

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  • Tania Babina

Abstract

Using U.S. Census firm-worker data, I document that firms’ financial distress has an economically important effect on employee departures to entrepreneurship. The impact is amplified in the high-tech and service sectors, where employees are key assets. In states with enforceable noncompete contracts, the effect is mitigated. Compared to typical entrepreneurs, distress-driven entrepreneurs are high-wage workers who found better firms, as measured by jobs, pay, and survival. Startup jobs compensate for 33% of job losses at the constrained incumbents. Overall, the financial inability of incumbent firms to pursue productive opportunities increases the reallocation of economic activity into new firms.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Tania Babina, 2020. "Destructive Creation at Work: How Financial Distress Spurs Entrepreneurship," The Review of Financial Studies, Society for Financial Studies, vol. 33(9), pages 4061-4101.
    • Handle: RePEc:oup:rfinst:v:33:y:2020:i:9:p:4061-4101.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhz110
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    Citations

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    Cited by:

    1. Irastorza-Fadrique, Aitor & Levell, Peter & Parey, Matthias, 2023. "Household Responses to Trade Shocks," IZA Discussion Papers 16032, Institute of Labor Economics (IZA).
    2. Shang, Longfei & Saffar, Walid, 2024. "Pay transparency and entrepreneurship," Journal of Banking & Finance, Elsevier, vol. 162(C).
    3. Kun Jiang & Susheng Wang, 2024. "Survival tactics for distressed firms in emerging markets," Asia Pacific Journal of Management, Springer, vol. 41(2), pages 823-866, June.
    4. Malmendier, Ulrike M. & Borgschulte, Mark & Guenzel, Marius & Liu, Canyao, 2020. "CEO Stress, Aging, and Death," CEPR Discussion Papers 14933, C.E.P.R. Discussion Papers.
    5. Isaac Hacamo & Kristoph Kleiner, 2022. "Forced Entrepreneurs," Journal of Finance, American Finance Association, vol. 77(1), pages 49-83, February.
    6. Tania Babina & Alex X. He & Anastassia Fedyk & James Hodson, 2022. "Artificial Intelligence, Firm Growth, and Product Innovation," NBER Chapters, in: Economics of Artificial Intelligence, National Bureau of Economic Research, Inc.
    7. Mueller, Clemens, 2023. "Non-Compete Agreements and Labor Allocation Across Product Markets," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277621, Verein für Socialpolitik / German Economic Association.
    8. Ring, Marius, 2019. "Entrepreneurial Wealth and Employment: Tracing Out the Effects of a Stock Market Crash," MPRA Paper 107020, University Library of Munich, Germany, revised 06 Apr 2021.
    9. Winston Wei Dou & Yan Ji & David Reibstein & Wei Wu, 2021. "Inalienable Customer Capital, Corporate Liquidity, and Stock Returns," Journal of Finance, American Finance Association, vol. 76(1), pages 211-265, February.
    10. Babina, Tania & Fedyk, Anastassia & He, Alex & Hodson, James, 2024. "Artificial intelligence, firm growth, and product innovation," Journal of Financial Economics, Elsevier, vol. 151(C).
    11. Luis R. Gómez-Mejia & Francesco Chirico & Geoffrey Martin & Massimo Baù, 2023. "Best Among the Worst or Worst Among the Best? Socioemotional Wealth and Risk-Performance Returns for Family and Non-family Firms Under Financial Distress," Entrepreneurship Theory and Practice, , vol. 47(4), pages 1031-1058, July.

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