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Firm profitability and the network of organizational capabilities

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  • Wagner, Friedrich
  • Milaković, Mishael
  • Alfarano, Simone

Abstract

A Laplace distribution for firm profit rates (or returns on assets) can be obtained through the sum of many independent shocks if the number of shocks is Poisson distributed. Interpreting this as a linear chain of events, we generalize the process to a hierarchical network structure. The hierarchical model reproduces the observed distributional patterns of firm profitability, which crucially depend on the life span of firms. While the profit rates of long-lived firms obey a symmetric Laplacian, short-lived firms display a different behavior depending on whether they are capable of generating positive profits or not. Successful short-lived firms exhibit a symmetric yet more leptokurtic pdf than long-lived firms. Our model suggests that these firms are more dynamic in their organizational capabilities, but on average also face more risk than long-lived firms. Finally, short-lived firms that fail to generate positive profits have the most leptokurtic distribution among the three classes, and on average lose slightly more than their total assets within a year.

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Bibliographic Info

Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 389 (2010)
Issue (Month): 21 ()
Pages: 4769-4775

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Handle: RePEc:eee:phsmap:v:389:y:2010:i:21:p:4769-4775

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Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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Keywords: Firm profitability; Return on assets; Laplace distribution; Network organization; Industrial dynamics;

References

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  1. Giulio Bottazzi & Angelo Secchi, 2006. "Explaining the distribution of firm growth rates," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 235-256, 06.
  2. Alfarano, Simone & Milaković, Mishael, 2008. "Does Classical Competition Explain the Statistical Features of Firm Growth?," Economics Working Papers 2008,03, Christian-Albrechts-University of Kiel, Department of Economics.
  3. José Fariñas & Lourdes Moreno, 2000. "Firms' Growth, Size and Age: A Nonparametric Approach," Review of Industrial Organization, Springer, vol. 17(3), pages 249-265, November.
  4. Giulio Bottazzi & Angelo Secchi, 2006. "Gibrat's Law and diversification," Industrial and Corporate Change, Oxford University Press, vol. 15(5), pages 847-875, October.
  5. F. Pammolli & D. Fu & S. V. Buldyrev & M. Riccaboni & K. Matia & K. Yamasaki & H. E. Stanley, 2007. "A generalized preferential attachment model for business firms growth rates," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 57(2), pages 127-130, 05.
  6. Bottazzi, Giulio & Dosi, Giovanni & Lippi, Marco & Pammolli, Fabio & Riccaboni, Massimo, 2001. "Innovation and corporate growth in the evolution of the drug industry," International Journal of Industrial Organization, Elsevier, vol. 19(7), pages 1161-1187, July.
  7. Bottazzi, Giulio & Secchi, Angelo, 2003. "Why are distributions of firm growth rates tent-shaped?," Economics Letters, Elsevier, vol. 80(3), pages 415-420, September.
  8. Amaral, L.A.N. & Gopikrishnan, P. & Plerou, V. & Stanley, H.E., 2001. "A model for the growth dynamics of economic organizations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 127-136.
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Cited by:
  1. Alfarano, Simone & Milaković, Mishael & Irle, Albrecht & Kauschke, Jonas, 2012. "A statistical equilibrium model of competitive firms," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 136-149.
  2. Einar Erlingsson & Simone Alfarano & Marco Raberto & Hlynur Stefánsson, 2013. "On the distributional properties of size, profit and growth of Icelandic firms," Journal of Economic Interaction and Coordination, Springer, vol. 8(1), pages 57-74, April.

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