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

54 Pages Posted: 16 Dec 2018 Last revised: 18 Apr 2019

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: March 15, 2019

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

Suggested Citation

Cespedes, Jacelly and Huang, Xing and Parra, Carlos, More Cash Flows, More Options? The Effect of Cash Windfalls on Small Firms (March 15, 2019). 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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