Andrew Ellul- Entrepreneurs’ Diversification and Labor Income Risk

Finance

Speaker : Andrew Ellul (Kelley School of Business, Indiana University)

Room: T209

Abstract

Entrepreneurs with better diversified portfolios provide more insurance to employees
against labor income risk: in a sample of over 524,000 Canadian firms and 858,000
owners, firms owned by more diversified entrepreneurs offer more stable jobs and
earnings to employees when faced by idiosyncratic shocks. A one standard deviation
increase in owner’s diversification reduces the shock’s pass-through rate to labor
layoffs by 13% and to workers’ earnings by 41%. The data are consistent with such
insurance being partly provided to retain valuable human capital and partly to avoid
costly terminations. There is no evidence of insurance being priced in average wages.