Firm profitability and the network of organizational capabilities
AbstractA 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.
Volume (Year): 389 (2010)
Issue (Month): 21 ()
Contact details of provider:
Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/
Firm profitability; Return on assets; Laplace distribution; Network organization; Industrial dynamics;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Giulio Bottazzi & Giovanni Dosi & Marco Lippi & Fabio Pammolli & Massimo Riccaboni, 2001.
"Innovation and Corporate Growth in the Evolution of the Drug Industry,"
LEM Papers Series
2001/02, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
- 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.
- Giulio Bottazzi & Angelo Secchi, 2005.
"Explaining the Distribution of Firms Growth Rates,"
LEM Papers Series
2005/16, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
- 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.
- Bottazzi, Giulio & Secchi, Angelo, 2003. "Why are distributions of firm growth rates tent-shaped?," Economics Letters, Elsevier, vol. 80(3), pages 415-420, September.
- Alfarano, Simone & Milakovic, Mishael, 2008.
"Does classical competition explain the statistical features of firm growth?,"
Elsevier, vol. 101(3), pages 272-274, December.
- 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.
- Giulio Bottazzi & Angelo Secchi, 2006. "Gibrat's Law and diversification," Industrial and Corporate Change, Oxford University Press, vol. 15(5), pages 847-875, October.
- 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.
- S. V. Buldyrev & F. Pammolli & M. Riccaboni & K. Yamasaki & D.-F. Fu & K. Matia & 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 131-138, 05.
- 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.
- Irle, Albrecht & Milaković, Mishael & Alfarano, Simone & Kauschke, Jonas, 2008.
"A Statistical Equilibrium Model of Competitive Firms,"
Economics Working Papers
2008,10, Christian-Albrechts-University of Kiel, Department of Economics.
- 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.
- Erlingsson, Einar Jón & Alfarano, Simone & Raberto, Marco & Stefánsson, Hlynur, 2012.
"On the distributional properties of size, pro fit and growth of Icelandic firms,"
35857, University Library of Munich, Germany.
- 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.
- Einar Jón Erlingsson & Simone Alfarano & Marco Raberto & Hlynur Stefánssonn, 2012. "On the distributional properties of size, profit and growth of Icelandic firms," Working Papers 2012/01, Economics Department, Universitat Jaume I, Castellón (Spain).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.