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Firm profitability and the network of organizational capabilities

Author

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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.

Suggested Citation

  • Wagner, Friedrich & Milaković, Mishael & Alfarano, Simone, 2010. "Firm profitability and the network of organizational capabilities," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(21), pages 4769-4775.
  • Handle: RePEc:eee:phsmap:v:389:y:2010:i:21:p:4769-4775
    DOI: 10.1016/j.physa.2010.06.001
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    References listed on IDEAS

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    Cited by:

    1. Williams, Michael A. & Baek, Grace & Park, Leslie Y. & Zhao, Wei, 2016. "Global evidence on the distribution of economic profit rates," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 356-363.
    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;Society for Economic Science with Heterogeneous Interacting Agents, vol. 8(1), pages 57-74, April.
    3. 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.

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