The Effect of Personal Financing Disruptions on Entrepreneurship

Abstract

I show that disruptions to personal sources of financing, aside from commercial lending supply shocks, impair the survival and growth of small businesses. Entrepreneurs holding deposit accounts at retail banking institutions that defaulted following the financial crisis reduce personal borrowing and are consequently more likely to exit their firm. Exposure to the corresponding investment losses from delisted publicly traded bank stocks strongly reduces the rate of firm survival, particularly for early-stage ventures. At the intensive margin, owners who remain in business reduce employees after personal wealth losses. My results suggest that personal finance is an important component of firm financing.

Keywords: Entrepreneurship, Small Business, Personal Finance, Financial Crisis, Bank Defaults

JEL Classification: L26, D14, G01, G11, G21, G33