Small is Beautiful but Size Matters: The Asymmetric Impact of Uncertainty and Sunk Costs on Small and Large Businesses
AbstractAgainst the backdrop of the theories developed in the real options and financing constraints literatures, this paper examines the impact of profit uncertainty and sunk costs on firms’ entry and exit decisions. For our empirical analysis, we compile an extensive dataset containing information on 267 U.S. manufacturing industries over a 30-year period containing industry-specific information on the number of firms and establishments, the size distribution of establishments, measures of sunk capital costs and profit uncertainty, among others. Our dynamic panel data estimates show that greater uncertainty about profits, especially in conjunction with higher sunk costs, results in (1) a marked decrease in the number of small firms and establishments; (2) a less skewed size distribution of firms and establishments; and (3) a marginal increase in industry output concentration. In sharp contrast, large establishments seem virtually unaffected. The results point to uncertainty in conjunction with sunk costs fundamentally affecting firms’ decision-making and altering the structure of industries by putting smaller businesses at a disadvantage.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 5461.
Date of creation: Jul 2007
Date of revision:
Uncertainty; sunk costs; real options; financing constraints; decision-making; small businesses;
Find related papers by JEL classification:
- L40 - Industrial Organization - - Antitrust Issues and Policies - - - General
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- O30 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - General
- L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
- D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-03 (All new papers)
- NEP-BEC-2007-11-03 (Business Economics)
- NEP-CFN-2007-11-03 (Corporate Finance)
- NEP-ENT-2007-11-03 (Entrepreneurship)
- NEP-MIC-2007-11-03 (Microeconomics)
- NEP-TID-2007-11-03 (Technology & Industrial Dynamics)
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