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 3: Growth Rates Distributions

Alex Coad

Subjects: economics and finance, evolutionary economics, industrial organisation

Extract

3. Growth rate distributions The previous chapter presented one of the oldest and best-known empirical regularities in industrial organization – the skewed firm size distribution. In this chapter, we focus on the growth rate distribution. Regularities in the distribution of firm growth rates were discovered only recently, a little over ten years ago, but the characteristic ‘tent-shaped’ distribution has been observed in a wide variety of databases and appears to be a remarkably robust feature of firm growth and industrial dynamics. We begin this chapter by surveying the empirical literature investigating the distribution of firm growth rates (section 3.1) before moving on to some theoretical models that attempt to explain the emergence of the observed distribution (section 3.2). 3.1 GROWTH RATE DISTRIBUTIONS It has long been suspected that the distribution of firm growth rates is fat-tailed. In an early contribution, Ashton (1926) considers the growth patterns of British textile firms and observes that ‘In their growth they obey no one law. A few apparently undergo a steady expansion . . . With others, increase in size takes place by a sudden leap’ (Ashton, 1926, pp. 572–3). Little (1962) investigates the distribution of growth rates, and also finds that the distribution is fat-tailed. Similarly, Geroski and Gugler (2004) compare the distribution of growth rates to the normal case and comment on the fat-tailed nature of the empirical density. Recent empirical research, from an ‘econophysics’ background, has discovered that the distribution of firm growth rates closely follows the parametric form of the Laplace density. Using...

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