Destructive Creation at Work: How Financial Distress Spurs Entrepreneurship

52 Pages Posted: 28 Feb 2017 Last revised: 1 Oct 2020

See all articles by Tania Babina

Tania Babina

Columbia Business School - Finance and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2019

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.

Keywords: Financial distress, Capital Structure, Entrepreneurship, Start-ups, Human Capital

JEL Classification: D22, D24, G32, G33, L22, L26

Suggested Citation

Babina, Tania, Destructive Creation at Work: How Financial Distress Spurs Entrepreneurship (September 1, 2019). US Census Bureau Center for Economic Studies Paper No. CES-WP-17-19, Columbia Business School Research Paper No. 17-31, Available at SSRN: https://ssrn.com/abstract=2924627 or http://dx.doi.org/10.2139/ssrn.2924627

Tania Babina (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

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