The Firm Growth Pattern in the Restaurant Industry: Does Gibrat’s Law Hold?

Abstract

This study tests the relationship between firm size and rate of growth, based on Gibrat's Law. The core idea of Gibrat's Law is that firm growth rates should be independent of firm size. The minimum efficient scale (MES) of level of output and merger and acquisition (M&A) are also considered in analyzing the relationship. Overall, this study shows that Gibrat's Law does not hold in the restaurant industry. Firm growth patterns reveal that small firms are expected to grow faster than their larger competitors. However, larger firms grow faster when they remain below MES, whereas smaller firms show higher growth rates when they are operated at a point above MES. Firms executing M&A show that firm growth rate is independent of firm size, supporting Gibrat's Law. This study does not evidence persistent growth after M&A for those firms above MES. Nevertheless, M&A is still an effective growth strategy for those who are below MES.