Understanding the Size and Profitability of Firms: The Role of a Biological Factor
Title: Understanding the Size and Profitability of Firms: The Role of a Biological Factor
Series/Report no.: EUI ECO; 2011/01
We collect information on prenatal testosterone in a large sample of entrepreneurs by measuring the length of their 2th to 4th fingers in face to face interviews. Entrepreneurs with higher exposure to prenatal testosterone (lower second to fourth digit ratio) manage larger firms, are matched with larger firms when acquire control and experience faster average growth over the years they manage the firm. We also find that prenatal testosterone is correlated with elicited measures of entrepreneurial skills such as ability to stand work, and the latter are correlated with firm size. This evidence suggests entrepreneurial skills have a biological component and is consistent with models of the size distribution of firms based on entrepreneurial ability. However, firms run by high-testosterone entrepreneurs have lower profitability as measured by return on assets. We offer evidence that this is because the same biological factor that enhances entrepreneurial skills also induces empire building preferences, which leads high-testosterone entrepreneurs to target a firm size that exceeds the profit maximizing value.
Subject: Firm size distribution; Entrepreneurial success; Digit ratio; L26; L21; L25; D22
We thank for helpful comments Fabiano Schivardi and seminar participants at the European University Institute,the Einaudi Institute for Economics and Finance, University of California Los Angeles, University College London, the conference New directions in applied microeconomics, NYU-Villa la Pietra.
Type of Access: openAccess