Abstract
The extensive empirical literature on the validity of Gibrat's law does not in general verify the law as it finds that firms’ growth rates are negatively correlated with both firm size and age. However, some studies find that Gibrat's law holds for sub‐samples of firms such as large firms or firms belonging to special industries. It has been pointed out that these results are due to the fact that the likelihood of firm survival for natural reasons is positively related to firm size and age. This study uses a relatively large and representative sample of Danish firms to evaluate the validity of Gibrat's law for different kinds of firms over the period 1990 ‐ 2003. In contrast to the majority of earlier studies our analysis corrects for the bias in the estimations by using variables related to the survival of small firms.
Highlights
The high unemployment in Europe over the past thirty years has attracted a lot of political interest in the developments of private companies as an important creator of jobs
The creation of new firms and the development of existing firms has always been a central topic in economics
In this paper we use the dynamic specification of the regression models as originally suggested by Chesher (1979) to test Gibrat’s law as to whether firm growth rates are independent of firm size
Summary
The high unemployment in Europe over the past thirty years has attracted a lot of political interest in the developments of private companies as an important creator of jobs One result of this particular focus on employment has been that many countries as well as the EU have designed special measures in their industrial policies to support small and medium sized firms. Denoting the size of firm i at time t by Xit and the proportional scale factor by gt, the law could be formulated as: Xit − X it−1 = gt X it−1 An implication of this proportionality between firms’ absolute growth and their size is that the growth rates.
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