How Big Data Benefits Only Big Firms
A new research sheds light on a puzzling question: Why are large firms thriving while smaller ones are struggling? One possible explanation, according to this new study by MIT Sloan School of Management’s Maryam Farboodi, is rooted in the growth of Big Data. The study notes that Big Data, which refers to the immense amount of digital information we generate and have an increasing ability to store and manipulate, disproportionately advantages large companies over small ones. (Read the full report here)
Today’s investors rely on Big Data to help them make smarter investment decisions,” says Farboodi, Assistant Professor of Finance at the school. “Because big companies produce more data relative to smaller companies, investors have more information to go on. This abundance of data, coupled with faster computer processing speeds, helps investors view these large companies as a less risky bet. As a result, big companies get more than their fair share of financing.”
In contrast, Farboodi explains that small firm doesn’t have a lot of data and the high uncertainty makes investors reluctant to finance these firms. Statistics suggest that small firms are going through a tough time. In the last three decades, the annual rate of new startups has slipped to less than 8 percent from 13 percent, according to previous research that the authors cite in their paper.
Farboodi, and her coauthors, Juliane Begenau of Stanford University’s Graduate School of Business and Laura Veldkamp of Columbia University Business School, comes up with a model to demonstrate how the growth of Big Data influence the evolution of firm distribution. Their findings are published in the latest issue of the Journal of Monetary Economics.
The key insight of this model is that the benefits of Big Data are not spread evenly among companies: small, young companies beneﬁt less. In some ways, this is understandable. Big companies, after all, have more economic activity and longer company histories so they have more data to process and analyze. As Big Data technology improves, large firms will continue to attract a more than proportional share of data processing, and investor support and interest.
The study also has important takeaways for smaller companies. Mainly, that the more data they produce, the better chance they stand of lowering their cost of capital. The researchers conclude that if investors can better understand their returns, they will face lower risk and will be more willing to finance them. That would decrease the cost of capital faced by these firms and help them explore growth opportunities.
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