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Understanding the size and profitability of firms: The role of a biological factor

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  • Guiso, Luigi
  • Rustichini, Aldo

Abstract

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 pre-natal 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.

Suggested Citation

  • Guiso, Luigi & Rustichini, Aldo, 2011. "Understanding the size and profitability of firms: The role of a biological factor," CEPR Discussion Papers 8205, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:8205
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    References listed on IDEAS

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    1. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2015. "Matching Firms, Managers, and Incentives," Journal of Labor Economics, University of Chicago Press, vol. 33(3), pages 623-681.
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    4. Prescott, Edward C & Visscher, Michael, 1980. "Organization Capital," Journal of Political Economy, University of Chicago Press, vol. 88(3), pages 446-461, June.
    5. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
    6. Robert E. Lucas Jr., 1978. "On the Size Distribution of Business Firms," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 508-523, Autumn.
    7. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    8. Xavier Gabaix, 2009. "Power Laws in Economics and Finance," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 255-294, May.
    9. Zhang, Zhen & Zyphur, Michael J. & Narayanan, Jayanth & Arvey, Richard D. & Chaturvedi, Sankalp & Avolio, Bruce J. & Lichtenstein, Paul & Larsson, Gerry, 2009. "The genetic basis of entrepreneurship: Effects of gender and personality," Organizational Behavior and Human Decision Processes, Elsevier, vol. 110(2), pages 93-107, November.
    10. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-1177, December.
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    Citations

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    Cited by:

    1. Ferrante, Francesco & Ruiu, Gabiele, 2014. "Entrepreneurship. How important are institutions and culturally-based prior beliefs?," MPRA Paper 41915, University Library of Munich, Germany.
    2. Tran, Hien Thu & Carbonara, Emanuela & Santarelli, Enrico, 2017. "Determinants of Novice, Portfolio and Serial Entrepreneurship: An Occupational Choice Approach," GLO Discussion Paper Series 74, Global Labor Organization (GLO).
    3. Mion, Giordano & Opromolla, Luca David, 2014. "Managers' mobility, trade performance, and wages," Journal of International Economics, Elsevier, vol. 94(1), pages 85-101.
    4. Humphery-Jenner, Mark & Powell, Ronan, 2014. "Firm size, sovereign governance, and value creation: Evidence from the acquirer size effect," Journal of Corporate Finance, Elsevier, vol. 26(C), pages 57-77.
    5. repec:kap:jtecht:v:42:y:2017:i:5:d:10.1007_s10961-016-9475-6 is not listed on IDEAS
    6. John V.C. Nye & Maxim V. Bryukhanov & Sergiy S. Polyachenko, 2014. "2D:4D and Life Outcomes: Evidence from the Russian RMLS Survey," HSE Working papers WP BRP 78/EC/2014, National Research University Higher School of Economics.
    7. Cobb-Clark, Deborah A., 2016. "Biology and Gender in the Labor Market," IZA Discussion Papers 10386, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    digit ratio; entrepreneurial success; firm size distribution;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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