Are Differences in Firm Size Transitory or Permanent

Cross-section or short-panel econometric techniques typically used to examine Gibrat’s Law of Proportionate Effect suggest that some degree of mean reversion exists, but may exaggerate the apparent randomness of corporate growth. We argue that a more natural way to explore the long-run distribution of firm sizes is to examine data on the growth of particular firms over long periods of time. Using a sample of 77 UK firms’ real total net assets data observed continually for more than 30 years, our conclusions are that growth rates are highly variable over time, but differences in growth rates between firms do not persist for very long. Further, firms show no tendency to converge to either a common size or to a pattern of stable size differences over time. These results are compared and contrasted with standard approaches using the same data, which suggest firms reach and maintain stable positions in a skewed size distribution.

[1]  Nicholas Oulton,et al.  Growth and Size of Firms , 1996 .

[2]  Michael Woodford,et al.  Plant-Level Adjustment and Aggregate Investment Dynamics , 1995 .

[3]  Oded Galor,et al.  Convergence ? : Inferences from Theoretical Models , 2017 .

[4]  P. A. V. B. Swamy,et al.  Statistical Inference in Random Coefficient Regression Models , 1971 .

[5]  Bronwyn H Hall,et al.  The Relationship between Firm Size and Firm Growth in the U.S. Manufacturing Sector , 1986 .

[6]  S. Durlauf,et al.  Interpreting Tests of the Convergence Hypothesis , 1994 .

[7]  C. I. Jones,et al.  Productivity across industries and countries : time series theory and evidence , 1996 .

[8]  M. Pesaran,et al.  ESTIMATION AND INFERENCE IN SHORT PANEL VECTOR AUTOREGRESSIONS WITH UNIT ROOTS AND COINTEGRATION , 2000, Econometric Theory.

[9]  A. Hughes,et al.  Applied Economics and Public Policy: Semi-parametric estimation of the company size–growth relation , 1998 .

[10]  Andrew Chesher,et al.  Testing the Law of Proportionate Effect , 1979 .

[11]  David S. Evans.  Tests of Alternative Theories of Firm Growth , 1987, Journal of Political Economy.

[12]  J. Yahav,et al.  Random Effects, Fixed Effects, Convolution, and Separation , 1981 .

[13]  G. Fisher,et al.  Growth, Profitability and Valuation. , 1969 .

[14]  Andrew B. Bernard,et al.  Comparing Apples to Oranges: Productivity Convergence and Measurement across Industries and Countries , 2001 .

[15]  Andrew B. Bernard,et al.  Technology and Convergence , 1996 .

[16]  Stephen Machin,et al.  Corporate Growth and Profitability , 2003 .

[17]  Paul Dunne,et al.  Age, Size, Growth and Survival: UK Companies in the 1980s , 1994 .

[18]  Andrea Bonaccorsi,et al.  On the Relationship Between Firm Size and Export Intensity , 1992 .

[19]  Danny Quah,et al.  Empirical cross-section dynamics in economic growth , 1993 .

[20]  E. Bradley,et al.  A theory of growth , 1976 .

[21]  M. Pesaran,et al.  Maximum likelihood estimation of fixed effects dynamic panel data models covering short time periods , 2002 .

[22]  M. Pesaran,et al.  Estimating Long-Run Relationships From Dynamic Heterogeneous Panels , 1995 .

[23]  D. Quah.  Galton's Fallacy and Tests of the Convergence Hypothesis (Now published in Scandinavian Journal of Economics 95 (4), 1993, pp.427-443.) , 1993 .

[24]  Steven N. Durlauf,et al.  Convergence in International Output , 1995 .

[25]  Danny Quah,et al.  Twin peaks : growth and convergence in models of distribution dynamics , 1996 .

[26]  Steven N. Durlauf,et al.  Multiple regimes and cross‐country growth behaviour , 1995 .

[27]  G. Maddala,et al.  A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test , 1999 .

[28]  G. Rosenbluth,et al.  The evolution of giant firms in Britain , 1978 .

[29]  M. Nerlove,et al.  Biases in dynamic models with fixed effects , 1988 .

[30]  X. Sala-i-Martin,et al.  The Classical Approach to Convergence Analysis , 1996 .

[31]  Kitack Lee,et al.  Growth and Convergence in a Multicountry Empirical Stochastic Solow Model , 1997 .

[32]  M. Pesaran,et al.  Testing for unit roots in heterogeneous panels , 2003 .

[33]  G. Whittington,et al.  The Size and Growth of Firms , 1975 .

[34]  J. Sutton.  Sunk Costs and Market Structure , 1991 .

[35]  Ricardo J. Caballero,et al.  Aggregate Employment Dynamics: Building from Microeconomic Evidence , 1995 .

[36]  J. Sutton.  Gibrat's Legacy , 1996 .

[37]  E. Cefis.  Is there persistence in innovative activities , 2003 .

[38]  J. R. Moore,et al.  The theory of the growth of the firm twenty-five years after , 1960 .

[39]  Daniel S. Hamermesh,et al.  Adjustment Costs in Factor Demand , 1996 .

[40]  T. C. Edens,et al.  Economic Growth , 1957, The Journal of Economic History.

[41]  Paul Geroski,et al.  HOW PERSISTENTLY DO FIRMS INNOVATE , 1997 .

[42]  J. M. Samuels,et al.  Size and The Growth of Firms , 1965 .