Firm Dynamics Research Articles

Limited Firm Insurance and Aggregate Implications

This paper studies the impacts of financial shocks on firm insurance, firm dynamics, and macroeconomic implications. A key departure from the literature is that firms provide wage insurance contracts to risk-averse workers in a long-term relationship. Such contracts endogenously impose a form of inflexible debt liability to firms, and make firms with limited financial net worth more vulnerable to shocks than others. In our model, firms have heterogenous productivity and financial net worth, and also firms face financial frictions. Search and matching in the labor market endogenously determines the value of wage contract, and thus the level of liability to the firm. We have three new findings: (1) The wage dynamics of the quantitative model are consistent with those in empirical studies, with significant insurance against firm-level idiosyncratic shocks, and also a weak comovement between aggregate wage and GDP when there are aggregate shocks. (2) Firms with limited financial resources are hit by financial shocks significantly more than others, with larger negative impacts on dividends, credit borrowing, firm value, and firm entry; the endogenous wage insurance also becomes more limited, and there are more separations. These impacts on both firms and workers are different from—and cannot be accounted for by—standard models with a representative firm or worker. (3) Quantitative exercises for the Great Recession in the United States suggest that aggregate productivity shocks and financial shocks play different roles; without financial shocks, we cannot account for the dynamics of financial variables, including the reduced credit borrowing, spikes in credit spreads, and large drops in dividend payments. Lastly, we provide microlevel empirical supports for our model implications. This paper was accepted by Lukas Schmid, finance. Funding: Y. Wang acknowledges the financial support from the National Natural Science Foundation of China [Grant 72150003] and the grant from Shenzhen Municipal Government [Grant 1210614103]. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.01627 .

Mergers, firm size, and volatility in a granular economy

We study the firm dynamics associated with mergers and acquisitions (M&A) and their implications at the micro and macro levels. Our paper presents three main findings: (i) mergers generate a more fat-tailed firm-size distribution, thereby amplifying granular fluctuations and increasing aggregate volatility; (ii) the impact of mergers depends on strategic market power and endogenous markups; and (iii) under endogenous markups, we provide a novel characterization of the firm size-volatility relationship in which volatility declines disproportionately with size. We build a quantitative model of domestic horizontal mergers and find a sizeable impact of mergers on aggregate volatility using counterfactual analysis.

The Real Effects of Zombie Lending in Europe

‘Zombie lending’ occurs when a lender supports an otherwise insolvent borrower. Recent studies document that zombie lending has been widespread following the European sovereign debt crisis. In this paper, I develop a quantitative model to study the impact of these lending practices on firm dynamics. In the model, firm liquidations and zombie lending arise endogenously. The model provides a good match to key euro‐area firm statistics over the period 2011–14. I find that zombie lending has a substantial impact on borrowing costs, helping more low‐productivity firms to survive. This, in turn, causes a drag on aggregate output, investment and productivity.

Term structures and firm dynamics: A FAVAR approach

This study employs a Factor-Augmented Vector Auto-Regression approach with Chinese bond markets and aggregated firm-level data to investigate the impact of term structure shocks on firm dynamics and aggregate firm-level variables. We address the potential endogenous issue using a novel instrumental variable based on textual analysis, and find that term structure shocks have long-run and persistent influences on several firm-level outcomes, and that firm dynamics play a critical role in the transmission of term structure shocks.

Examining the Influential Role of Family CEO and Investment on Tunneling: A BoundTest Approach

Tunneling is one of the ferocious corporate frauds mostly practiced in concentrated firms. This creates principal-principal agency conflict which influences the entire company operation and discourages investors. This study examined whether growth opportunities and family chief executive officer (CEO) smooth the way for tunneling practices in concentrated firms. The study analyzed panel quantitative data through a fixed effect model and autoregressive distributed lagged (ARDL) to forecast the short and long-run nexus. The finding shows that an increase in investment for expansion purposes creates a way for outward tunneling, which means that controlling shareholders secure their private benefits while availing growth opportunities. In addition, the study forecasts that these positive nexuses will be sustained significantly in the short and long run. Further, the current study also found that family CEOs tackle and minimize expropriation due to sustaining business, getting growth, and having a good reputation in the market. The study helped the regulatory body design policy, providing thorough information to investors strengthening governance mechanisms, and protecting shareholder's rights. The findings contribute to understanding governance dynamics in concentrated firms and highlight the need for regulatory measures to curb tunneling.

Environmental regulation, endowment characteristics and income inequality: A general equilibrium analysis

Environmental regulations such as the “dual carbon” target directly act on the restriction of the total amount of dirty capital to reduce carbon emissions. The change in factor endowment will have a range of effects on production and income distribution. To examine the effects of environmental regulations restricting dirty capital endowment on income distribution, this paper presents a general equilibrium model with two sectors and three factors. The unregulated clean capital-intensive sector is imperfectly competitive and features firm dynamics, using labor and clean capital as factors of production, while the regulated dirty capital-intensive sector is perfectly competitive using labor and dirty capital. We show that a decrease in the dirty capital endowment will reduce the output of the dirty capital-intensive sector and expand the clean capital-intensive sector in the long run, making society transition to green production. The tighter the restriction on the use of the dirty capital endowment is, the more firms will enter the clean capital-intensive sector, while the business-stealing effect will reduce the output of individual clean firms. We further show that the rents of both dirty and clean capital will rise while the wage of labor will fall due to the regulation. Changes in factor prices do not necessarily lead to inequality in income distributions. When the factor substitution effect in the regulated sector is large enough, clean production regulation will increase the share of labor income and decrease the share of capital income.

Observational learning and firm dynamics

AbstractThis article investigates the implications of observational learning for firm dynamics. Because consumers learn through past purchase decisions, monopolistic firms can induce information cascades through prices. We characterize when cascades arise and argue that the fragile nature of cascades is reflected in firm‐level data. We measure fragility using reversals: periods when a firm with historically stable revenues experiences a large, sudden change in earnings. We document a robust pattern that the frequency of reversals among stable firms declines with age, and show a calibration exercise delivers an untargeted age profile in line with the data. Finally, efficiency is discussed.

Dynamic Capabilities of Environmentally Sustainable Enterprises: An Exploratory Study

This article explores the shift towards environmentally sustainable innovation from a dynamic capabilities perspective, identifying key capabilities influencing sustainable enterprise development. Employing a multiple case study design, the study explores four sustainable enterprises. The findings reveal sensing capabilities driven by knowledge acquisition, an environmentally conscious mindset and market assessment. Seizing capabilities involve co-innovation, knowledge combination and network establishment. Reconfiguring capabilities encompass workforce and supply-chain restructuring. The research emphasizes the importance of dynamic capabilities in sustainable enterprise strategy, offering insights for practitioners and researchers. It underscores the significance of a holistic approach to value creation and continuous adaptation in sustainability. The study, focusing on micro-foundations in an emerging economy, provides unique insights into the dynamics of sustainable firms, contributing to a deeper understanding of their strategic foundations.

Tech hubs within cities—determinants and dynamics

AbstractThis paper explores the microgeographic determinants of firm birth activity and relocation patterns in the digital economy simultaneously. The study investigates the spatial dynamics of young firms within Berlin, Hamburg, and Munich using geo-coded data of firm births and relocation from 2009 to 2016 aggregated at a 1 × 1 km2 grid level. The panel fixed effect regression models examine the impact of changes within persistent city structures on the location choices using several control variables. The findings suggest that firm clustering, commercial building density, and higher rent prices positively influence firm births, while the impact of knowledge institutions in the neighborhood is mixed. Relocation patterns highlight the role of proximity to competitors, with higher prices in areas not deterring relocations. These findings contribute to understanding firm location choices within cities by considering the two avenues of growth and highlight the future need for further investigations on the microgeography of firm growth dynamics.

China's declining business dynamism

AbstractWe document five novel facts about the dynamism of Chinese manufacturing firms between 2003 and 2018. We show that: (i) the revenue and capital shares of young firms have declined, (ii) life‐cycle growth of firm revenues and assets has declined, (iii) life‐cycle growth of process efficiency / product quality and investment in intangibles has declined (iv) younger firms have higher capital productivity than older firms, with the gap increasing over time, and (v) the dispersion of capital growth and the responsiveness of capital growth to capital productivity have both declined. Using a simple model, we estimate that the lower life‐cycle productivity growth of young firms reduces manufacturing productivity growth by 0.8 percentage points annually, and worsening allocative efficiency of capital between young and old firms reduced manufacturing total factor productivity by 1.25% between the early 2000s and late 2010s. We find that business dynamism is weaker in provinces where state‐owned enterprises account for a larger share of the capital stock.

Does small firm dynamics matter for occupation diversity and job quality? Evidence from Brazil

Recent studies have explored the role of firm dynamics and the connection to job reallocation. However, limited attention has been devoted to the role of micro and small firms in this process, particularly about the quality of the jobs generated. Therefore, this article aims to measure the impact of micro and small firm dynamics on occupation diversification in Brazil, with specific emphasis on job quality. The study used data from 558 microregions within the Brazilian industrial sector between 2003 and 2015. Panel data were applied to three econometric models: Feasible Generalized Least Squares (FGLS), Driscoll–Kraay (DK) and Instrumental Variable (IV) models for robustness analysis, including Two-Stage Least Squares (2SLS), Limited Information Maximum Likelihood (LIML), and the Generalized Method of Moments with Continuously Updating Estimators (GMM-CUE). Our main finding reveals that the dynamics of micro and small firms positively impact occupation diversity in Brazil, leading to the creation of a wider range of job types. Furthermore, the frequency of change of firms from microenterprises to small businesses increases the occupation diversity in the Brazilian industrial sector. Our findings are significant in providing policy recommendations for developing countries to achieve a more diverse labor market.

Succession and gender dynamics in family firms – A systematic literature review and future research agenda

The influences of gender relations and gender dynamics within family firm succession have been widely studied in recent decades. However, there have been few attempts to synthesise existing results in the field. Thus, this article aims to provide a systematic literature review focusing exclusively on the gendered issues related to family firm succession processes. A comprehensive analysis of 57 journal articles extracted from the Scopus database was conducted. As a result, (1) the topics of gendered influences on daughter’s succession in family firms, (2) gender and succession processes in family firms, and (3) gender and intra-family relationships in family firm succession are identified as the central areas. Based on these findings, a future research agenda is outlined. The paper contributes to the field of family firm research by highlighting the research trends in the gendered analysis of family firm succession, and by pointing out under-researched areas that merit further exploration.

Assessing the impact of small firm dynamics on public mental health amid the pandemic in Latin America

ObjectiveThe aim of our study is to examine the relationship between the economic activity of small firms and the mental well-being of the population in five Latin American countries in the early stages of the pandemic.MethodsWe utilize the search volume of certain keywords on Google Trends (GT), such as “boredom,” “frustration,” “loneliness,” “sleep”, “anxiety”, and “depression”, as an indicator of the well-being of the population. By examining the data from Facebook Business Activity Trends, we investigate how social attention reacts to the activity levels of different economic sectors.ResultsIncreased business activity is generally associated with reduced levels of boredom, loneliness, sleep problems and anxiety. The effect on depression varies by sector, with positive associations concentrated in onsite jobs. In addition, we observe that strict Non-Pharmaceutical Interventions (NPIs) tend to exacerbate feelings of boredom and loneliness, sleep issues, and anxiety.ConclusionsOur findings suggest a strong association between different indicators of psychological well-being and the level of activity in different sectors of the economy. Given the essential role of small and medium-sized enterprises (SMEs) in generating employment, especially during crises like the pandemic, it is imperative that they remain resilient and adaptable to support economic recovery and job preservation. To accomplish this, policymakers need to focus on providing financial stability and support for SMEs, fostering social support networks within companies, and incorporating mental health services into workplace environments. This comprehensive strategy can alleviate mental health challenges and enhance public health resilience.

Input delays, Firm Dynamics, and Misallocation in Sub-Saharan Africa

We quantitatively analyze the macroeconomic consequences of border delays in Sub-Saharan Africa. Delays of imported intermediate inputs lower aggregate output because of factor misallocation and due to an inefficiently low number of firms that uses foreign inputs in production. Our model economy features heterogeneous firms that endogenously differ in the degree to which foreign inputs are used. The model is calibrated to micro-level data from Sub-Saharan Africa. Reducing border delays can increase aggregate output by up to 9.4%. The gains are mainly due to a reallocation of economic activity towards more productive firms.

Demographic Origins of the Start-up Deficit

We propose a simple explanation for the long-run decline in the US start-up rate. It originates from a slowdown in labor supply growth since the late 1970s, largely predetermined by demographics. This channel can explain roughly half of the decline and why incumbent firm survival and average growth over the life cycle have changed little. We show these results in a standard model of firm dynamics and test the mechanism using cross-state variation in labor supply growth. Finally, we show that a longer entry rate series imputed using historical establishment tabulations rises over the 1960s–1970s period of accelerating labor force growth. (JEL D22, D25, E24, J11, J22, J23, M11)

Paper Travellers

Abstract The Gabinetto della Grafica of the Biblioteca Apostolica Vaticana preserves an album with views of Rome and Naples and reproductions of sculpture. From these, we make new attributions of the authorship of photographs, completing the catalogue of the work of such important authors as James Anderson, Michael Mang, Tommaso Cuccioni, Robert Rive, Giorgio Sommer and Giuseppe Ninci. We also reflect on the commercial dynamics of photographic firms in the nineteenth century and their important role in the consolidation of models and methodologies that served, from then on, for the construction of histories of architecture and art.

Simulating the emergence of superstar firms: The role of luck vs talent

This paper explores the dynamics of superstar firms, introduced by Rosen's seminal work on talent's role in success. The traditional viewpoint posits that technological advancements drive market dominance by highly talented individuals, creating a 'superstars' landscape. The paper challenges this perspective, introducing luck as a crucial and overlooked factor in shaping the success of superstar firms. Using an agent-based model, the study simulates the emergence of superstars in twelve countries. The results suggest that while talent and technology are essential, luck also plays a significant role in the 'rich get richer' phenomenon observed in superstar firms, emphasizing the multifaceted nature of success and suggesting opportune policy strategies to foster true meritocracy.

Regional Heterogeneity in Firm Dynamics: The Case of Italy

Regional Heterogeneity in Firm Dynamics: The Case of Italy

Business creation during COVID-19

Abstract Using UK data, we present greater empirical detail on the puzzling firm dynamics that emerged during coronavirus disease 2019 (COVID-19). We show that firm entry increased during the pandemic across several countries, and this contrasts with typical recessions where firm entry declines. Additionally, the rise in firm entry is driven by individual entrepreneurs creating companies for the first time, particularly in online retail. We find evidence that firm creation responded significantly to declines in retail footfall and that firms created during the pandemic are more likely to exit and less likely to post jobs. Overall, this implies that despite surging firm creation during the pandemic, the overall employment effect is limited. Finally, we find that the primary contributor to limited employment creation is the shift in ownership composition of new entrants during COVID.

Exploring Gender Dynamics and Environmental Sustainability in Family Firms

In an ever-changing landscape, family businesses, characterized by their unique blend of tradition, familial bonds, and entrepreneurial spirit, stand as bastions of resilience and continuity, playing a pivotal role in economic growth and societal development. Indeed, family businesses account for 80 percent of all business enterprises worldwide, making them the prevalent form of conducting business. As these entities grapple with the imperative to remain economically viable while navigating the intricacies of the contemporary business landscape, the incorporation of sustainable practices into the organizational fabric takes centre stage. By actively seeking a harmonious and reciprocal relationship between financial objectives, social responsibility, and environmental accountability, family businesses can not only secure their own longevity but also contribute to a more equitable and sustainable global environment. This narrative becomes especially compelling at the intersection with gender. Exploring the intersection between gender and sustainability provides insights into how gender dynamics influence and are influenced by efforts to achieve sustainable development. Moreover, understanding and addressing this interplay is essential for devising holistic and effective strategies that promote social equity, economic prosperity, and environmental stewardship. It underscores the need for inclusive and gender-sensitive approaches in all aspects of sustainable development. Acknowledging the significance of this ongoing dialogue, this study delves into the intricate relationship between gender dynamics and the environmental dimension of sustainability within family businesses. Through a systematic literature review of empirical research, this work specifically aims to uncover the linkage between board gender diversity and corporate environmental performance. The findings indicate that gender-diverse boards improve environmental value creation, and women in leadership positions correlate positively with environmental disclosure in family-controlled businesses. Overall, a strong positive correlation emerges between the proportion of women directors on the board and the level of environmental sustainability. The findings of this study hold implications not only for family business practitioners but also for policymakers and academics interested in propelling gender equality and sustainability agendas, notably within the framework of the 2030 Agenda for Sustainable Development.