Understanding the processes of firm growth - a closer look at serial growth rate correlation

Serial correlation in annual growth rates carries a lot of information on growth processes - it allows us to directly observe firm performance as well as to test hypotheses. Using a 7-year balanced panel of 10 000 French manufacturing firms, we observe that small firms typically are subject to negative correlation of growth rates, whereas larger firms display positive correlation. Furthermore, we find that those small firms that experience extreme positive or negative growth in any one year are unlikely to repeat this performance in the following year.Serial correlation, firm growth, quantile regression.

Distance to Frontier and Appropriate Business Strategy

This paper is an empirical test of the hypothesis that the appropriateness of different business strategies is conditional on the firms distance to the industry frontier. We use data on four 2-digit high-tech manufacturing industries in the US over the period 1972-1999, and apply semi-parametric quantile regressions to investigate the contribution of firm behavior to market value at various points of the conditional distribution of Tobin's q. Among our results, we observe that innovative activity, measured in terms of R&D expenditure or patents, has a strong positive association with market value at the upper quantiles (corresponding to the leader firms) whereas the innovative efforts of laggard firms are valued significantly less. Laggard firms, we suggest, should instead achieve productivity growth through efficient exploitation of existing technologies and imitation of industry leaders. Employment growth in leader firms is encouraged whereas growth of backward firms is not as well received on the stock market.Distance to frontier, Strategy, Market value, Innovation, Firm Growth

A Closer Look at Serial Growth Rate Correlation

Serial correlation in annual growth rates carries a lot of information on growth pro-cesses – it allows us to directly observe firm performance as well as to test theories. Using a 7-year balanced panel of 10 000 French manufacturing firms, we observe that small firms typically are subject to negative correlation of annual growth rates, whereas larger firms display positive correlation. Furthermore, we find that those small firms that experience extreme positive or negative growth in any one year are unlikely to repeat this performance in the following yearSerial correlation, firm growth, quantile regression, French manufacturing, fast-growth firms

Towards an Explanation of the Exponential Distribution of Firm Growth Rates

A robust feature of the corporate growth process is the exponential distribution of firm growth rates. This striking empirical regularity has been found to hold for a number of different datasets and at different levels of aggregation. In this paper, we propose a simple theoretical model capable of explaining this observed exponential distribution. We do not attempt to generalize on where growth opportunities come from, but rather we focus on how firms build upon growth opportunities. We borrow ideas from the self-organizing criticality literature to explain how the interdependent nature of discrete resources may lead to the triggering off a series of additions to a firm's resources. In a formal model we consider the case of employment growth in a hierarchy, and observe that growth rates follow an exponential distribution.Firm growth rates, exponential distribution, hierarchy.

Firms as Bundles of Discrete Resources - Towards an Explanation of the Exponential Distribution of Firm Growth Rates

A robust feature of the corporate growth process is the Laplace, or symmetric exponential, distribution of firm growth rates. In this paper, we sketch out a class of simple theoretical models capable of explaining this empirical regularity. We do not attempt to generalize on where growth opportunities comme from, but rather we focus on how firms build upon growth opportunites. We borrow ideas from the self-organizing criticality literature to explain how the interdependent nature of discrete resources may lead to the triggering off of a series of additions to a firm's resources. In a first formal model we consider the case of employment growth in a hierarchy, and observe that growth rates follow an exponential distribution. In a second model we include plant and capital as resources and we are able to reproduce a number of stylized facts about firm growth.Firm growth rates, exponential distribution, hierarchy, growth autocorrelation.

Firm growth and scaling of growth rate variance in multiplant firms

While Gibrat's Law assumes that growth rate variance is independent of size, empirical work has usually found a negative relationship between growth rate variance and firm growth. Using data on French manufacturing firms, we observe a relatively low, but statistically significant, negative relationship between firm size and growth rate variance. Furthermore, we observe that growth rate variance does not decrease monotonically the more plants a firm possesses, which is at odds with a number of theoretical models.

Distance to Frontier and Appropriate Business Strategy

This paper is an empirical test of the hypothesis that the appropriateness of different business strategies is conditional on the firm’s distance to the industry frontier. We use data on four 2-digit high-tech manufacturing industries in the US over the period 1972-1999, and apply semi-parametric quantile regressions to investigate the contribution of firm behavior to market value at various points of the conditional distribution of Tobin’s q. Among our results, we observe that innovative activity, measured in terms of R&D expenditure or patents, has a strong positive association with market value at the upper quantiles (corresponding to the leader firms) whereas the innovative efforts of laggard firms are valued significantly less. Laggard firms, we suggest, should instead achieve productivity growth through efficient exploitation of existing technologies and imitation of industry leaders. Employment growth in leader firms is encouraged whereas growth of backward firms is not as well received on the stock market.Distance to frontier; Strategy; Market value; Innovation; Firm growth

Neoclassical vs Evolutionary Theories of Financial Constraints : Critique and Prospectus

Complicated neoclassical models predict that if investment is sensitive to current financial performance, this is a sign that something is "wrong" and is to be regarded as a problem for policy. Evolutionary theory, on the other hand, refers to the principle of "growth of the fitter" to explain investment-cash flow sensitivities as the workings of a healthy economy. In particular, I attack the neoclassical assumption of managers maximizing shareholder-value. Such an assumption is not a helpful starting point for empirical studies into firm growth. one caricature of neoclassical theory could be "Assume firms are perfectly efficient. Why aren't they getting enoug funding ?", whereas evolutionary theory considers that firms are forever struggling to grow. This essay highlights how policy guidelines can be framed by the initial modelling assumptions, even though these latter are often chosen with analytical tractability in mind rather than realism.Financial constraints, firm growth, evolutionary theory, neoclassical theory, investment.

Muppets and gazelles: political and methodological biases in entrepreneurship research

Despite an almost universally accepted belief outside academia that entrepreneurial activity is a positive driving force in the economy, the accumulated evidence remains largely inconclusive. This article positions the increased interest in entrepreneurship since the 1980s within its historical context and highlights the significant methodological problems with its analysis. Taking these problems into account it reevaluates the performance of entrepreneurial firms in terms of innovation, job creation, economic growth, productivity growth, and happiness to show how both positive and negative interpretations can emerge. A pattern of increasingly positive interpretation is observed as one moves from analysis to policy. To address this bias, the article suggests the single category “entrepreneurial firms” be broken up along a continuum from the large number of economically marginal, undersized, poor performance enterprises to the small number of high performance “gazelles” that drive most positive impact on the economy. This would allow a more realistic evaluation of the impact of entrepreneurs by avoiding a composition fallacy that assigns the benefits of entrepreneurship to the average firm

Innovation and market value: a quantile regression analysis

We construct a new database by matching firm-level Compustat data to NBER patent data, for four 2-digit complex technology sectors. Whilst conventional regression estimators show that the stock market does recognise efforts at innovation, quantile regression analysis adds a new dimension to the literature, suggesting that the influence of innovation on market value varies dramatically across the market value distribution. For firms with a low value of Tobin's q, the stock market will barely recognize their attempts to innovate. For firms with the highest values of Tobin''s q, however, their market value is particularly sensitive to innovative activity.Innovation