Why Are Returns to Private Business Wealth So Dispersed?

Corina Boar, Denis Gorea and Virgiliu Midrigan

No 16992, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use micro data from Orbis on firm level balance sheets and income statements to document that accounting returns for privately held businesses are dispersed, persistent, and negatively correlated with firm equity. We also show that firms experience large, fat-tailed, and partly transitory changes in output that are not fully accompanied by changes in their capital stock and wage bill. This implies that capital and labor choices are risky, as fluctuations in output are accompanied by large changes in firm profits. We interpret this evidence using a model of entrepreneurial dynamics in which return heterogeneity can arise from both limited span of control, as well as from financial frictions which generate differences in financial returns to saving. The model matches the evidence on accounting returns and predicts that financial returns to saving are half as large and dispersed as accounting returns. Financial returns mostly reflect risk, as opposed to collateral constraints which play a negligible role due to firms' unwillingness to expand and take on more risk.

Keywords: Inequality; entrepreneurship; Rate of return (search for similar items in EconPapers)
JEL-codes: E2 E44 G32 (search for similar items in EconPapers)
Date: 2022-02
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