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

Abstract

We study how shocks to firms' internal resources affect firms' business success and owners' economic behaviors. We use a new source of variation in cash flows by exploiting the bonus that retailers earn when selling winning jackpot lottery tickets. Increases in a retailer's internal resources reduce the probability the company will survive. 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 bonus amount positively affects revenue and the 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, constraints that may result in both resource and talent misallocations.

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

JEL Classification: G32, L26, M13