European University Institute Library

Understanding the size and profitability of firms, the role of a biological factor, Luigi Guiso and Aldo Rustichini

eng

no index present

non fiction

Understanding the size and profitability of firms

772961791

Luigi Guiso and Aldo Rustichini

EUI working papers. ECO, 2011/01EUI papers

the role of a biological factor

We collect information on prenatal testosterone in a large sample of entrepreneurs by measuring the length of their 2th to 4th fingers in face to face interviews. Entrepreneurs with higher exposure to prenatal testosterone (lower second to fourth digit ratio) manage larger firms, are matched with larger firms when acquire control and experience faster average growth over the years they manage the firm. We also find that prenatal testosterone is correlated with elicited measures of entrepreneurial skills such as ability to stand work, and the latter are correlated with firm size. This evidence suggests entrepreneurial skills have a biological component and is consistent with models of the size distribution of firms based on entrepreneurial ability. However, firms run by high-testosterone entrepreneurs have lower profitability as measured by return on assets. We offer evidence that this is because the same biological factor that enhances entrepreneurial skills also induces empire building preferences, which leads high-testosterone entrepreneurs to target a firm size that exceeds the profit maximizing value