The Post-entry Size Adjustment of New small Firms

Abstract

The hypothesis underlined in this paper is that apart from infant mortality there is another relevant phenomenon taking place within new-born Small Business Enterprises (SBEs) in the period immediately after entry; namely that the smaller ones among them, having entered with a marked sub-optimal scale,adjust their size towards the mean size exhibited by larger SBEs. In the paper this hypothesis is tested using a cohort of 1,570 new firms, and applying a Gibrat-like specification with sample selection. The hypothesis of a size adjustment by smaller new entrants immediately after entry is confirmed in most selected industries in Italian manufacturing; more specifically, surviving smaller new SBEs show higher rates of growth in the first year (in one case in the first two) immediately after start-up, while they converge towards the average rate of growth of the whole cohort of new SBEs in the following years.-