Undiversifiable Portfolio Risk and Entrepreneurial Endeavors: Evidence from ESOP Terminations (Job Market Paper)

Employee Stock Ownership Plans (ESOPs) represent a sizable source of undiversifiable portfolio risk for many U.S. workers. ESOP termination events, due to mergers or share repurchases, are substantial de-risking events that may affect workers’ risk bearing capacity. I use firm and employee-level data to study how these terminations affect workers’ probabilities of transitioning into entrepreneurship. I find that employees are 25-30% more likely to become entrepreneurs or self-employed following an ESOP termination than employees of observationally similar continuing plans. The result also holds for employees who departed a firm shortly before an ESOP termination (whose share valuations still might otherwise not be determined for years), which addresses the concern that the cause of the termination (e.g., M&A) affects entrepreneurial entry through other channels such as unemployment due to downsizing. I also find that the effect on entry is stronger for groups likely to experience larger reductions in portfolio risk. My findings suggest that undiversifiable portfolio risk significantly deters households from engaging in high-risk career paths.