Abstract
This paper discusses the effects of the existence of natural and/or exogenously imposed thresholds in firm size distributions on estimations of the relation between firm size and the variance in firm growth rates. We argue that these estimations are upwardly biased whenever the threshold operates on the same proxy that is used to calculate the growth rates. We show the potential impact of the bias on simulated data, suggest a methodology to improve these estimations, and present an empirical analysis on Dutch firms. The only stable relation that emerges is the negative relationship between firm size and growth rate variance.
Highlights
Several studies on industrial dynamics and firm growth in particular, highlight that the variance in growth rates decreases with increasing firm size
To limit the biases deriving from truncation, we suggest the exclusion from the dataset of firms that are below a given size threshold M at time t − 1, and that the remaining firms are used to construct the balanced sample of growth rates between time t − 1 and time t
We have shown that a bias can arise in the estimation of the relation between firm size and variance in growth rates, when endogenous and/or exogenous thresholds truncate the firm size distribution; that is, when micro firms are included in the analysis or when the dataset considers only firms with sizes that are above a certain threshold in terms of numbers of employees
Summary
Several studies on industrial dynamics and firm growth in particular, highlight that the variance in growth rates decreases with increasing firm size. 8) observe that, beyond the possible economic explanations, a simple statistical phenomenon emerges when medium or small firms are included in the sample: “The high concentration of small establishments [...] highlights the issue of establishments (or corporations in other studies) that exit from a longitudinal database because they drop to size 0” This intuition is the starting point of our work. We show that the disappearance problem attenuates by running successive regressions between firm size and growth rate variance, where we successively eliminate smaller firms from the starting-year data set (but keep them in the second-year data set) Based on this result, we suggest the use of an alternative methodology that reduces the estimation bias.
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