We examine how negative liquidity shocks to households propagate to the firms they own. Our main tool for identification is a tax-driven shock to the household’s personal liquidity that is independent of the firm and of the household’s income and preexisting liquidity. We find that higher wealth tax payments on the personal home of a private firm’s controlling shareholder are associated with lower personal and corporate liquidity and with lower sales, investment, employment, and performance in the firm. Compared to shareholders without residential real estate, homeowners pay 19 percent more wealth tax, their liquidity decreases by two percent, and the firm’s revenues decrease by three percent. These findings imply that even strictly personal liquidity shocks to shareholders have causal effects on firm behavior illustrating the equity channel linking personal and firm financing. The negative spillover from shareholder illiquidity to firm behavior might be mitigated by increasing the wealth-tax payment threshold rather than excluding corporate assets from the tax base.
In a separate study, we use data from every Norwegian firm over twenty years to show that family characteristics help explain the profitability premium of family firms, shedding new light on the underlying theories. The family firm premium increases when the family owns a higher equity stake, has fewer owning members, and participates more actively in corporate governance. Less intuitively, the premium is also higher when the family has lower personal wealth, undiversified wealth, and illiquid shares. These results suggest that two important sources of the family firm premium are governance advantages due to low agency costs and financial disadvantages due to constrained funding.
In a follow-up study we examine the impact of the COVID-19 shock on the universe of family firms in Norway and compare it to the effect on nonfamily firms. It has often been argued that family firms have a closer relationship with their employees. However, whether family ownership is associated with more stable employment, especially in a downturn, is still an open question. We model firms’ firing and retention decisions and empirically examine the impact of a large negative shock (COVID-19 pandemic) on such decisions within the universe of family and nonfamily firms in Norway. Our model predicts that family firms can be less likely to fire workers compared to nonfamily firms, but also that the relationship is mediated by the nonfirm wealth of the controlling family. We find that family wealth plays a significant role in determining whether family firms are less likely to fire employees. Consistent with our model, we find that firms owned by the wealthiest families do not provide higher employment protection, rather they show higher propensity to cut employment.
In recent years, there has been a growing literature at the intersection of corporate finance and household finance. Better and larger datasets have allowed researchers to address important questions about financial constraints, firm growth and entrepreneurial talent (Hurst and Lusardi 2004, Hvide and Møen 2010, Schmalz, Sraer and Thesmar, 2017). This literature has provided new evidence on the returns to entrepreneurship, financial constraints facing startups, and the factors that influence entrepreneurial success.
In this project, we aim to contribute to this new and growing literature. We will focus on the interface between the personal and the corporate sphere. We plan to examine two main research questions:
1. How are personal liquidity shocks transmitted to the firm level?
2. How important are a family’s financial and human resources for the success of the family firm?
