Analyzing the Distributions of the Stochastic Firm Growth Approach

Abstract

Recently there has been a renewed interest in the study of firm size distributions and firm growth rate distributions. The stochastic firm growth approach builds on the assumption that firm growth rates are independent identically distributed and size is determined by a first order autoregressive process leaving the size distribution log-normal. This paper analyzes these distributional patterns in an empirical context questioning the foundation of the stochastic growth approach. In a cross section analysis of four industries using Danish data it is shown that the foundation for and the outcome of the stochastic firm growth process as it has so far been conceived are empirically far-fetched. In particular significant deviations from normality are found with respect to third and fourth moments.Firm Growth Rate and Size Distributions, Evolution of Industries