We will examine the impact of the financial crisis and the Great Recession on the financial and real outcomes of young firms using the more detailed NORC enclave version of the Kauffman Firm Survey (KFS). The KFS tracks a sample of 4,928 firms founded in 2004 to 2011 (as of present). We will first document the basic patterns in the data surrounding how these young firms evolved in the years leading up to, during, and following the recession years 2008 and 2009. In particular, we will examine how total amount of financing and mix of financing (e.g., bank debt, trade credit, owner equity, outside equity, etc.) evolved. We will also examine how the employment, in terms of full-time and part-time employees and wages, and the revenues, profits, and productivity of these firms evolved. We will also examine firm failure hazards over the same time period. In presenting these facts, we will condition on key firm, owner, and geographical characteristics, such as industry, regional economic and industrial characteristics, whether the firm characterizes its business model as innovative or holds patents, as well as the demographics and initial ownership stake percentages and values of the founders. Doing so will enable us to see which types of firms and owners were more or less affected and in what ways during the recession.
After documenting these basic patterns, we will further investigate to what extent financial shocks stemming from the crisis impacted the real outcomes of the firms in the KFS. To do this, we must try to separate between demand and supply effects on the real outcomes of the KFS firms. We will employ two strategies. First, we will exploit new questions added to the KFS starting in 2008 which ask about whether the firm applied for financing but was turned down and why. These variables can be used as a measure of financial constraints and as instruments for changes in financing in firms that are arguably independent of the demand for the firms' product. Second, we have merged detailed county-level data on economic indicators, such as unemployment rates and disposable income, and banking market measures. We will use the economic indicators as controls for local demand shocks and will use the banking market variables to distinguish regions in which the banks were more vulnerable to the crisis with the assumption that firms, especially those financed with bank debt, in areas where banks were more vulnerable to the crisis would have a larger shock to their financial health. We will use this analysis to gauge the impact of the financial crisis on firms' real outcomes and their owners' wealth via their equity stakes in the firms.
This chapter examines immigrant entrepreneurship and the survival and growth of immigrant-founded businesses over time relative to native-founded companies. Kerr and Kerr quantify immigrant contributions to new firm creation in a wide variety of fields and using multiple definitions. While significant research effort has gone into understanding the economic impact of immigration into the United States, comprehensive data for quantifying immigrant entrepreneurship are difficult to assemble. The researchers combine several restricted-access U.S. Census Bureau data sets to create a unique longitudinal data platform that covers 1992-2008 and many states. The authors describe differences in the types of businesses initially formed by immigrants and their medium-term growth patterns. They also consider the relationship of these outcomes to the immigrants' age at arrival to the United States.
Are founders the best CEOs for their firms? While the popular press often celebrates exceptional individuals such as Steve Jobs and Jeff Bezos - who were able to both create and lead their companies to tremendous success over the years - much less is known about the managerial capabilities of "typical" Founder CEOs. This paper addresses this gap in the literature by investigating the management practices adopted by firms that are owned and managed by their original founder using a comprehensive data set with detailed information on a broad range of managerial processes across 8,000 medium sized manufacturing firms in 20 countries. We find that founder owned and led firms are on average much less likely to adopt managerial best practices compared to those with other types of ownership, even after taking into account differences in firm size and age. While the managerial gap of founder CEO firms is particularly acute among young companies, it is still persistent in older organizations, suggesting positive but limited managerial learning along CEO tenure. Since management and firm performance are strongly correlated regardless of ownership, the reluctance or inability to adopt managerial best practices translates into sizable differences in terms of firm productivity and profitability.
This paper describes the available data and research on venture capital investments and performance. We comment on the challenges inherent in those data and research as well as possible opportunities to do better.
Zarutskie and Yang examine the evolution of several key firm economic and financial variables in the years surrounding and during the Great Recession using the Kauffman Firm Survey, a large panel of young firms founded in 2004 and surveyed for eight consecutive years. The researchers find that these young firms experienced slower growth in revenues, employment, and assets and faced tighter financing conditions during the recessionary years. While they find some evidence that firm growth picked up following the recession, it is not clear that it returned to the levels it would have been absent the recessionary shock. The authors find little evidence that financing conditions for young firms loosened following the recession and show that financing constraints, in addition to diminished demand, may have contributed to these firms' slower growth. They discuss the strengths and the limitations of the Kauffman Firm Survey in measuring the impact of the Great Recession on young firms and their founders and consider features of future data collection and measurement efforts that would be useful in studying entrepreneurial activity over the business cycle.
Kennickell, Kwast, and Pogach use the Federal Reserve's 2007, 2009 re-interview of 2007 respondents, and 2010 Surveys of Consumer Finances (SCFs) to examine the experiences of small businesses owned and actively managed by households during these turbulent years. This is the first paper to use these SCFs to study small businesses even though the surveys contain extensive data on a broad cross-section of firms and their owners. The researchers find that the vast majority of small businesses were severely affected by the financial crisis and the Great Recession, including facing tight credit constraints. The authors document numerous and often complex interdependencies between the finances of small businesses and their owner-manager households, including a more complicated role of housing assets than has been reported previously. They find that workers who lost their job responded in part by starting their own small business, and that factors correlated with the survival of a small business differed greatly depending upon whether the firm was established or new. The results strongly reinforce the importance of relationship finance to small businesses, and the primary role of commercial banks in such relationships. The authors find that both cross-section and panel data are needed to understand the complex issues associated with the creation, survival and failure of small businesses.
Using a linked database based on a list of all Small Business Administration (SBA) loans in 1992 to 2011 and annual information on all U.S. employers from 1976 to 2012, Brown, Earle, and Morgulis apply detailed matching and regression methods to estimate the variation in SBA loan effects on job creation across firm age and size groups. The firm-level proportional impact of loan receipt is estimated to fall with pre-loan firm size and age, and is largest for start-ups and very young and very small firms. The number of jobs created per million dollars of loans is also estimated to be highest for start-ups but otherwise generally increases with size and age. The estimated survival impact of loan amount is larger for smaller and younger firms.
In addition to the conference paper, the research was distributed as NBER Working Paper w21733, which may be a more recent version.
A central challenge in the measurement of entrepreneurship is accounting for the wide variation in entrepreneurial quality across firms. This paper develops a new approach for estimating entrepreneurial quality by linking the probability of a growth outcome (e.g., achieving an IPO or a significant acquisition) as a function of start-up characteristics observable at or near the time of initial business registration (e.g., the firm name or filing for a trademark/patent). Stern and Guzman's approach allows them to characterize entrepreneurial quality at an arbitrary level of geographic granularity (placecasting) and in advance of observing the ultimate growth outcomes associated with any cohort of start-ups (nowcasting). They implement this approach in Massachusetts from 1988-2014, yielding several key findings. First, consistent with Guzman and Stern (2014), the authors find that a small number of observable start-up characteristics allow them to distinguish the potential for a significant growth outcome: in an out-of-sample test, more than 75% of growth outcomes occur in the top 5% of their estimated quality distribution. Second, the researchers propose two new economic statistics for the measurement of entrepreneurship: the Entrepreneurship Quality Index (EQI) and the Regional Entrepreneurship Cohort Potential Index (RECPI). They use these indices to offer a novel characterization of changes in entrepreneurial quality across space and time. For example, they are able to document changes in entrepreneurial quality leadership between the Route 128 corridor, Cambridge and Boston, as well as more granular assessments that allow them to distinguish variation in average entrepreneurial quality down to the level of individual addresses. Third, they find a high correlation between an index that depends only on information directly observable from business registration records (and so can be calculated on a real-time basis) with an index that allows for a two-year lag that allows the estimate of entrepreneurial quality to incorporate early milestones such as patent or trademark application or being featured in local newspapers. Finally, the authors find that the most significant "gap" between their index and the realized growth outcomes of a given cohort seem to be closely related to investment cycles: while the most successful cohort of Massachusetts start-ups was founded in 1995, the year 2000 cohort registered the highest estimated quality.
Bennett, Lawrence, and Sadun investigate the management practices adopted by firms where the founders are also the CEOs using data from the World Management Survey. The researchers find that founder CEO firms have the lowest management scores of any owner-manager pair types and that this difference is associated with significant performance differentials. The authors propose three possible reasons for the managerial gap of founder CEO firms: a) informational problems preventing a clear understanding of the weakness of their firm's managerial practices; b) institutional factors dampening the incentive to adopt managerial practices; and c) non-pecuniary returns to potentially inefficient but power-preserving practices. The initial findings presented in the paper provide support for a) and c), while the authors do not find evidence that the management practices of founder CEO firms vary with respect to the characteristics of the institutional environments in which they are embedded.
The Potential of Linked Employee-Business Data in Entrepreneurial Research
Recent research shows that the job creating prowess of small firms in the U.S. is better attributed to startups and young firms that are small. But most startups and young firms either fail or don't create jobs. A small proportion of young firms grow rapidly and they account for the long lasting contribution of startups to job growth. High growth firms are not well understood in terms of either theory or evidence. Although the evidence of their role in job creation is mounting, little is known about their life cycle dynamics, or their contribution to other key outcomes such as real revenue growth and productivity. In this paper, Haltiwanger, Jarmin, Kulick, and Miranda explore these issues using the U.S. Census Bureau Longitudinal Business Database combined with evidence from the Census Business Register to explore the role of high growth and young firms further. In exploring these issues, the researchers use new real revenue and productivity measures developed from the integration of these comprehensive databases tracking U.S. firms and establishments.
The non-pecuniary benefits of managing a small business are a first order consideration for many nascent entrepreneurs, yet the preference for business ownership is mostly ignored in models of entrepreneurship and occupational choice. In this paper, Hurst and Pugsley study a population with varying entrepreneurial tastes and wealth in a simple general equilibrium model of occupational choice. This choice yields several important results: (1) entrepreneurship can be thought of as a normal good, generating wealth effects independent of any financing constraints, (2) non-pecuniary entrepreneurs select into small scale firms, (3) subsidies designed to stimulate more business entry can have regressive distributional effects. Despite abstracting from other important considerations such as risk, financing constraints, and innovation, the researchers show that non-pecuniary compensation is particularly relevant in discussions of small businesses.
New Evidence from the Survey of Consumer Finances
Small Businesses and Small Business Finance during the Financial Crisis and the Great Recession: New Evidence from the Survey of Consumer Finances
Arthur B. Kennickell
Federal Reserve Board
Myron L. Kwast
Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
August 6, 2013
This paper uses data from the Federal Reserve's Survey of Consumer Finances (SCF) in 2007, 2009 and 2010 to examine the experiences of new and established small businesses owned and actively managed by households during the recent financial crisis and the ensuing recession. We believe this is the first paper to present such a comprehensive analysis of small businesses during this extraordinary period, and it is certainly the first to use these SCFs' data on small businesses. Importantly, the small business data on earlier SCFs were expanded considerably on the 2010 survey, and the 2009 survey re-interviewed the 2007 SCF's respondents. Thus, the combination of the three surveys provides a totally new, unique and logically consistent data set to examine a wide variety of factors that affected both new and established small businesses during these turbulent years.
In addition to providing a comprehensive analysis of small businesses over the crisis and its immediate aftermath, this paper contributes significantly to three core strains of the small business literature: (1) distinctions between new and established small businesses, (2) interdependencies and other interactions between household and small business finance, and (3) the importance of "relationship finance" for small business. More specifically, this study helps answer a large number of important questions of continuing interest to policymakers, researchers and the broader small business community. How were both new and established small businesses, and especially their access to credit and other critical financial services, affected by the financial crisis and recession? Were smaller firms affected differently than larger firms? What are some of the most important differences between small businesses that failed and those that survived this period? What are some of the most important interdependencies and other interactions between household and small business finance? What types of financial institutions did small businesses use and what are the most important products and services they consumed? Was a small business' relationship with a financial institution tied to both sides of the institution's balance sheet and were local financial institutions more important than more distant suppliers of financial services? Before and after the crisis, what are the key characteristics of households who owned and actively managed a small business relative to households who did not engage in these activities? What types of small businesses did households own and actively manage? How were these businesses acquired and what types of ownership structures were used?
The paper proceeds as follows. Section I reviews briefly the extensive small business finance literature with the dual aims of distinguishing our study from that literature and placing our work within its context. Section II describes the SCF's small business data, including important differences across the three surveys. This description sets the stage for our substantive analysis which proceeds in four parts. Section III uses variables available on both the 2007 and 2010 SCFs to compare small businesses before and after the financial crisis and recession. Section IV uses the 2007 survey and its 2009 panel re-interview to examine small businesses during the crisis and recession. The next section employs the expanded small business data collected on the 2010 SCF and similar data collected on the 2009 panel to study the experiences and characteristics of small businesses as the crisis and recession were beginning to abate. Section, uses the findings from the previous three sections to draw general conclusions about the experiences of small businesses owned and actively managed by households over the full time period covered by the three surveys. The paper ends with a brief conclusion that includes suggestions for future research with the SCF's small business data.
Job Creation, Small vs. Large vs. Young, and the SBA
Wealth, Tastes, and Entrepreneurial Choice
The Promise and Potential of Linked Employer-Employee Data for Entrepreneurship Research
Nowcasting and Placecasting Entrepreneurial Quality and Performance