The post crisis economy - tentative and risk-averse.
A firm’s aversion to capital markets can persist for decades after a recession. A recent paper by Antoinette Schoar and Luo Zuo, from MIT’s Sloan School of Management, concludes that managers who begin their career during a recession have a conservative management style when compared with their non-recession peers. The authors find that early career experiences are important and can influence firm-level decisions even decades later, when the “recession manager” becomes a CEO. The companies headed by these managers are reluctant to access public markets, have lower capital budgets and pay higher effective tax. If the pattern from previous downturns holds, then we can expect the next generation of business leaders to eschew capital markets in favour of self-sufficiency. Firms will invest less in capital-intensive projects and in research and development (R&D) to tightly control finances.
This strain of financial conservatism could also impact start-ups that seek to commercialise innovative technology. Typically, in the aftermath of a recession, the flow of money to early-stage companies is reduced. This may not be a bad thing. It is possible that during boom times, excess capital dents financial discipline, and leads investors to fund mediocre ventures. In contrast, during a recession, investors are more diligent about their investment. In fact, a study by the Kauffman Foundation found that more than half of the companies on the 2009 Fortune 500 list were launched during a recession or bear market.
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