More Cash Flows, More Options? The Effect of Cash Windfalls on Small Firms
42 Pages Posted: 16 Dec 2018 Last revised: 19 Dec 2018
Date Written: December 14, 2018
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. Findings highlight importance of considering business owners’ outside options when studying small firms.
Keywords: cash windfall, small business, liquidity constraint, entrepreneurship
JEL Classification: G32, L26, M13
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