Papers and Slides
The distribution of long-term firm performance
Abstract: The distribution of firm size and many other economic variables has been well-documented. This study documents the distribution of firm profit, a key variable whose distribution has received little attention despite its economic salience. Across large samples for contemporary US and European firms as well as historic US firms, only between 27% and 37% of firms have been to earn profits above their cost of capital over a twenty-year period. A three-parameter stochastic process based on a geometric random walk describes the distribution of observed profits remarkably well and explains why most firms do not earn their cost of capital. Thus, this study provides a deeper understanding into the generation process of long-term profit, an economic variable that is central to market-based economies.
Measuring Founding Strategy
Jorge Guzman with Aishen Li
Abstract: We propose an approach to measure strategy using text-based machine learning. The key insight is that distance in the statements made by companies can be partially indicative of their strategic positioning with respect to each other. We formalize this insight by proposing a new measure of strategic positioning—the strategy score—and defining the assumptions and conditions under which we can estimate it empirically. We then implement this approach to score the strategic positioning of a large sample of startups in Crunchbase in relation to contemporaneous public companies. Startups with a higher founding strategy score have higher equity outcomes, reside in locations with more venture capital, and receive a higher amount of financing in seed financing events. One implication of this result is that founding strategic positioning is important for startup performance.
Unconventional times: Demand shocks, competition, capability, and innovation
Yue Maggie Zhou with Frank Li and Sendil Ethiraj
Abstract: We develop a formal model to predict innovation as a choice affected by industry competition, market size, and firm heterogeneity in technological capability. Our model first predicts a selection effect, that the threshold of firm capability for entry will decrease with aggregate market size (holding competition constant) and increase with competition (holding market size constant). In addition, it predicts two opposing effects of market size on innovation: A direct positive effect due to increased demand, and an indirect negative effect due to increased competition induced by the lessened selection. Furthermore, our model predicts heterogeneous responses to macro demand shocks and competition across firms with different capability. We test these predictions by comparing innovations pursued by operators of unconventional wells in the United States before and after the 2014 oil price crash.
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