Understanding the Size and Profitability of Firms: The Role of a Biological Factor

48 Pages Posted: 31 Jan 2011

See all articles by Luigi Guiso

Luigi Guiso

Einaudi Institute for Economics and Finance (EIEF)

Aldo Rustichini

University of Minnesota - Twin Cities - Department of Economics

Date Written: January 2011

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.

Keywords: digit ratio, entrepreneurial success, firm size distribution

JEL Classification: D22, L21, L25, L26

Suggested Citation

Guiso, Luigi and Rustichini, Aldo, Understanding the Size and Profitability of Firms: The Role of a Biological Factor (January 2011). CEPR Discussion Paper No. DP8205. Available at SSRN: https://ssrn.com/abstract=1749846

Luigi Guiso (Contact Author)

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Sallustiana 62
Rome, 00187
Italy
+39 06 4792 4858 (Phone)
+39 06 4792 4872 (Fax)

HOME PAGE: http://www.eief.it/faculty-visitors/faculty-a-z/luigi-guiso/

Aldo Rustichini

University of Minnesota - Twin Cities - Department of Economics ( email )

271 19th Avenue South
Minneapolis, MN 55455
United States

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