Firm profitability and the network of organizational capabilities

Friedrich Wagner, Mishael Milaković and Simone Alfarano

Physica A: Statistical Mechanics and its Applications, 2010, vol. 389, issue 21, 4769-4775

Abstract: A Laplace distribution for firm profit rates (or returns on assets) can be obtained through the sum of many independent shocks if the number of shocks is Poisson distributed. Interpreting this as a linear chain of events, we generalize the process to a hierarchical network structure. The hierarchical model reproduces the observed distributional patterns of firm profitability, which crucially depend on the life span of firms. While the profit rates of long-lived firms obey a symmetric Laplacian, short-lived firms display a different behavior depending on whether they are capable of generating positive profits or not. Successful short-lived firms exhibit a symmetric yet more leptokurtic pdf than long-lived firms. Our model suggests that these firms are more dynamic in their organizational capabilities, but on average also face more risk than long-lived firms. Finally, short-lived firms that fail to generate positive profits have the most leptokurtic distribution among the three classes, and on average lose slightly more than their total assets within a year.

Keywords: Firm profitability; Return on assets; Laplace distribution; Network organization; Industrial dynamics (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:389:y:2010:i:21:p:4769-4775

DOI: 10.1016/j.physa.2010.06.001

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