Testing "Gibrat's Law" for Young Firms – Empirical Results for West Germany

The present paper deals with the question whether "Gibrat's law" is applicable to firms founded between 1989 and 1994 within the West German manufacturing sector or not. We find that firm size follows approximately a log normal distribution. Within the context of the econometric analyses conducted in the present study, firms are subdivided into young firms belonging to technology intensive and non-technology intensive branches as well as in different size classes. A method introduced in Chesher (1979) is used to explore "Gibrat's law" in order to examine the influence of firm size on growth. Using data from the ZEW-Foundation Panel (West), "Gibrat's law" is rejected for the group of young firms belonging to technology intensive branches as well as for those operating in non-technology intensive branches in all periods examined but no significant differences between both firm groups can be observed. This confirms the results of a number of empirical studies over the last few years, indicating that smaller firms have larger growth potential than larger ones.

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