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Entrepreneurs’ Diversification and Labor Income Risk

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Abstract

Entrepreneurs with more diversified portfolios of private firms provide more insurance against labor income risk: in a sample of over 524,000 Canadian firms and 858,000 owners, firms owned by such entrepreneurs offer more stable jobs and earnings to employees. In firms whose owners’ portfolios are one standard deviation more diversified, the passthrough rates of foreign sales shocks to layoffs and labor earnings are 13% and 41% lower, respectively. These entrepreneurs reduce their own compensation and increase firm leverage to fund labor income insurance. Enhanced insurance is associated with better retention of valuable human capital and fewer costly terminations, potentially improving firm performance.

Suggested Citation

  • Jan Bena & Andrew Ellul & Marco Pagano & Valentina Rutigliano, 2025. "Entrepreneurs’ Diversification and Labor Income Risk," CSEF Working Papers 754, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:754
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    More about this item

    Keywords

    labor income risk; portfolio diversification; firm shocks.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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