Working Paper: CEPR ID: DP16992
Authors: Corina Boar; Virgiliu Midrigan; Denis Gorea
Abstract: We use micro data from Orbis on firm level balance sheets and income statements to document that accounting returns for privately held businesses are dispersed, persistent, and negatively correlated with firm equity. We also show that firms experience large, fat-tailed, and partly transitory changes in output that are not fully accompanied by changes in their capital stock and wage bill. This implies that capital and labor choices are risky, as fluctuations in output are accompanied by large changes in firm profits. We interpret this evidence using a model of entrepreneurial dynamics in which return heterogeneity can arise from both limited span of control, as well as from financial frictions which generate differences in financial returns to saving. The model matches the evidence on accounting returns and predicts that financial returns to saving are half as large and dispersed as accounting returns. Financial returns mostly reflect risk, as opposed to collateral constraints which play a negligible role due to firms' unwillingness to expand and take on more risk.
Keywords: inequality; entrepreneurship; rate of return
JEL Codes: E2; E44; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial frictions (G19) | accounting returns (M41) |
| limited span of control (M54) | return heterogeneity (B50) |
| risk (D81) | financial returns (G12) |
| collateral constraints (D10) | financial returns (G12) |
| equity (D63) | accounting returns (M41) |
| output fluctuations (E39) | firm profits (L21) |
| firm productivity (D22) | financial returns (G12) |
| entrepreneurs' risk preferences (D81) | financial returns (G12) |