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

42 Pages Posted: 16 Dec 2018 Last revised: 19 Dec 2018

See all articles by Jacelly Cespedes

Jacelly Cespedes

University of Minnesota - Carlson School of Management

Xing Huang

Washington University in St. Louis - Olin Business School

Carlos Parra

Pontifical Catholic University of Chile - School of Business

Date Written: December 14, 2018

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. 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

Suggested Citation

Cespedes, Jacelly and Huang, Xing and Parra, Carlos, More Cash Flows, More Options? The Effect of Cash Windfalls on Small Firms (December 14, 2018). Available at SSRN: https://ssrn.com/abstract=3301451 or http://dx.doi.org/10.2139/ssrn.3301451

Jacelly Cespedes (Contact Author)

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://sites.google.com/site/jacellycespedes/

Xing Huang

Washington University in St. Louis - Olin Business School ( email )

Simon Hall 211
Washington University in St. Louis
St. Louis, MO 63130
United States

Carlos Parra

Pontifical Catholic University of Chile - School of Business ( email )

Vicuna Mackenna 4860
Santiago
Chile

HOME PAGE: http://www.carlosrparra.com/

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