Post-entrepreneurial Wage-employments: Signaling Effects from Entrepreneurial Experience

Abstract

While there is a growing body of research examining the labor market value for former entrepreneurs, the theoretical and empirical evidence so far provides surprisingly mixed conclusions. Building on signaling theory, we provide novel explanations for earnings differences among individuals who enter paid employment after periods of entrepreneurship. Based on a unique and homogenous sample of 213 Swedish former entrepreneurs, we test hypotheses concerning how various signals of human capital, individually and collectively, affect the former entrepreneurs’ wages as employees. We find that ex-entrepreneurs’ salary levels prior to their entrepreneurial endeavors and when longer time has passed since their last employment offer important signals of their general capabilities when returning to wage work. We also find that an individual who signals higher level of entrepreneurship-specific human capital through longer entrepreneurial experience or a proven capability to grow a venture receives higher wages than other ex-entrepreneurs. Moreover, we document that third-party endorsement emanating from the receipt of government subsidies results in higher salaries. Most importantly, we find that signals of stronger general capabilities, represented by higher wages prior to being an entrepreneur, are magnified by successful entrepreneurship and by endorsements from external fund providers. These findings are consistent with the signaling literature arguing that complementary signals are particularly useful to reducing uncertainty in noisy environments, such as situations when employing ex-entrepreneurs.