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. 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 firms’ internal resources reduce the probability of survival. The evidence is not consistent with deteriorating credit behavior or owner retirement. Small business owners receiving 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 own no real estate assets. Finally, the amount of the bonus has a positive impact on revenues and number of employees for the 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