Running to Stand Still: Dimensions of Firm Growth and Governance

Abstract

Using establishment-level micro data on Compustat firms, we develop a novel decomposition of firm employment growth. Our decomposition reveals that on average, firms in this sample rely more on growth from acquiring and founding new establishments than on growth of existing establishments. Importantly, closures and sales of establishments make a significant negative growth contribution that more than offsets the growth of existing establishments. We then examine how the quality of governance, as measured by the strength of protection from takeovers, is associated with the various components of firm growth. In line with the literature, we find that poor governance is associated with lower firm growth. However, this lower growth for poorly governed firms appears to be the result of both a lower growth rate for existing and new establishments, and a significantly greater rate of establishment closures and sales. We do not find any significant differences in the contribution of acquisitions to growth. Together, our results suggest that well-governed firms are able to better manage growth through efficient investments and thus have a more balanced growth portfolio than poorly governed firms.