The Growth of Firms

The Growth of Firms

A Survey of Theories and Empirical Evidence

New Perspectives on the Modern Corporation series

Alex Coad

Much progress has been made in empirical research into firm growth in recent decades due to factors such as the availability of detailed longitudinal datasets, more powerful computers and new econometric techniques. This book provides an up-to-date catalogue of empirical work, as well as a coherent theoretical structure within which these new results can be interpreted and understood. It brings together a large body of recent research on firm growth from a multidisciplinary perspective, providing an up-to-date synthesis of stylized facts and empirical regularities. Numerous empirical findings and theories of firm growth are also surveyed and compared in order to evaluate their validity.

Chapter 2: Firm Size Distributions

Alex Coad

Subjects: economics and finance, evolutionary economics, industrial organisation


A suitable starting point for studies into industrial structure and dynamics is the firm size distribution, which is one of the oldest and most fundamental stylized facts about firm size and growth. In fact, it was while contemplating the empirical size distribution that Robert Gibrat (1931) proposed the well-known ‘Law of Proportionate Effect’ (also known as ‘Gibrat’s law’), which has arguably been the most influential model of firm growth. Even today, the firm size distribution continues to receive a lot of attention from both empirical researchers and theoretical modellers. In this chapter we begin by reviewing empirical evidence on the firm size distribution (section 2.1). Empirical work seems to suggest that the lognormal or the Pareto are useful approximations to the aggregate firm size distribution (de Wit, 2005). In section 2.2 Gibrat’s model of the lognormal firm size distribution is presented. Section 2.3 presents some preliminary evidence on the age distribution of firms, and section 2.4 combines a Gibrat process within cohorts with the distribution of firm age to derive a Pareto firm size distribution. 2.1 SIZE DISTRIBUTIONS The observation that the firm size distribution is positively skewed proved to be a useful point of entry for research into the structure of industries. (See Figures 2.1 and 2.2 for some examples of aggregate firm size distributions.) Gibrat (1931) considered the size of French firms in terms of employees and concluded that the lognormal distribution was a valid heuristic. Hart and Prais (1956) presented further evidence on the size distribution, using...

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