More Cash Flows, More Options? The Effect of Cash Windfalls on Small Firms

Abstract

This paper studies the effect of shocks to firms’ internal resources on business success and on owners’ economic behaviors. We use a new source of variation in cash flows by exploiting the bonus that retailers earn when selling jackpot-winning lottery tickets. Increases in the retailer’s internal resources reduce the probability the company will survive. The evidence is not consistent with deteriorating credit behavior or owner retirement but instead suggests that small business owners who receive large cash windfalls are more likely to start new businesses in non-retail industries. This effect becomes stronger when owners reside in low-income ZIP codes or do not own real estate assets. Finally, the amount of the bonus has a positive impact on revenues and number of employees for those retailers that remain open. Overall, our results suggest that small business owners may face financial constraints in their attempts to grow both internally and externally, which may result in both resource and talent misallocation.

Keywords: cash windfall, small business, financial constraints, entrepreneurship, Mega Millions, Powerball, lottery

JEL Classification: G32, L26, M13