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

  • Luigi Guiso

    (European University Institute and EIEF)

  • Aldo Rustichini

    (Department of Economics, University of Minnesota)

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 prenatal 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.

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File URL: http://www.eief.it/files/2012/09/wp-19-understanding-the-size-and-profitability-of-firms_the-role-of-a-biological-factor.pdf
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Paper provided by Einaudi Institute for Economics and Finance (EIEF) in its series EIEF Working Papers Series with number 1019.

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Length: 45 pages
Date of creation: 2010
Date of revision: Dec 2010
Handle: RePEc:eie:wpaper:1019
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  1. Oriana Bandiera & Luigi Guiso & Andrea Prat & Raffaella Sadun, 2012. "Matching Firms, Managers, and Incentives," CEP Discussion Papers dp1144, Centre for Economic Performance, LSE.
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