Working Paper: NBER ID: w24550
Authors: Juliane Begenau; Maryam Farboodi; Laura Veldkamp
Abstract: One of the most important trends in modern macroeconomics is the shift from small firms to large firms. At the same time, financial markets have been transformed by advances in information technology. We explore the hypothesis that the use of big data in financial markets has lowered the cost of capital for large firms, relative to small ones, enabling large firms to grow larger. Large firms, with more economic activity and a longer firm history offer more data to process. As faster processors crunch ever more data – macro announcements, earnings statements, competitors' performance metrics, export demand, etc. – large firms become more valuable targets for this data analysis. Once processed, that data can better forecast firm value, reduce the risk of equity investment, and thus reduce the firm's cost of capital. As big data technology improves, large firms attract a more than proportional share of the data processing, enabling large firms to invest cheaply and grow larger.
Keywords: Big Data; Finance; Firm Growth; Cost of Capital
JEL Codes: E21; G10; D83
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| big data technology improvements (C55) | lower cost of capital for large firms (G32) |
| lower cost of capital for large firms (G32) | larger firm size (L25) |
| large firms generate more data (C55) | lower risk premia (G19) |
| lower risk premia (G19) | lower cost of capital for large firms (G32) |
| big data technology improvements (C55) | larger firm size (L25) |
| media coverage (L82) | lower expected returns on widely covered stocks (G12) |
| larger firms (L25) | better forecasting of firm value (G17) |
| better forecasting of firm value (G17) | lower risk associated with equity investment (G12) |
| lower risk associated with equity investment (G12) | lower cost of capital for large firms (G32) |
| small firms (L25) | less benefit from big data technology improvements (C55) |
| big data technologies growth (O00) | divergence in firm sizes (L25) |