The Effect of Personal Financing Disruptions on Entrepreneurship

Credit market disruptions have been shown to affect business lending and the borrowingbehavior of firms. For small businesses however, financing is most often suppliedby the owner’s assets and debt financing from personal loans. This paper studies howidiosyncratic financing shocks experienced by entrepreneurs during operations affectthe survival of their firms. Variation in personal wealth and debt financing stem fromthe solvency of retail banking institutions following the 2007-2009 financial crisis. Ifind that retail bank disruptions reduce personal borrowing and increase the rate offirm exit. Personal wealth changes from investment losses strongly reduce the rateof entrepreneurial survival, especially for less experienced small business owners. Inaddition, personal losses have large effects on the intensive margin, as firm ownerssignificantly reduce employed staff. My results suggest that personal financing disruptionsplay an important role in explaining entrepreneurial exit.