Firm Growth Rates Research Articles

The limits to the growth of multinational firms in a foreign market

AbstractTheories of growth for firms have suggested that slow managerial growth is a major constraint why firms cannot grow faster. This paper is built on such a view and explores the factors that may influence the growth rate of Japanese firms in a given US industry. It is found that Japanese firms that allocated more internal and international managerial resources (proxied by expatriates) to their US operations tended to achieve higher growth rates. Japanese firms that were geographically diversified and those that spread their international investment projects evenly over time also achieved higher growth rates. Copyright © 2003 John Wiley & Sons, Ltd.

Why are distributions of firm growth rates tent-shaped?

Recent empirical analyses on different datasets have revealed a common exponential behavior in the shape of the probability density of the corporate growth rates. We present new evidence on this topic from the Italian Manufacturing Industry and propose a very simple mechanism that, under rather general assumptions, provides a robust explanation for the observed regularities.

Small Firm Growth in the UK Regions 1994-1997: Towards an Explanatory Framework

H ART M. and M C G UINNESS S. (2003) Small firm growth in the UK regions 1994-1997: towards an explanatory framework, Reg. Studies 37 , 109- 122. This paper examines the scale of regional variations in small firm growth in the United Kingdom in manufacturing and services over the period 1994-97. An attempt is made to develop a theoretical framework to explain these variations and to provide an empirical test with the use of multivariate techniques. The results demonstrate that, particularly for the service sector, the nature of the external business environment provides an important part of the explanation of the observed spatial variations in small firm growth for the period 1994-97. There were quite distinct processes at work in determining the spatial variation in growth rates for small firms in the manufacturing and service sectors. This finding has important implications for interventions at regional and national level designed to enhance the fortunes of the small firms. The manufacturing equation, for example, identified the positive role of regional financial assistance in stimulating growth, while the influx of service sector FDI was a significant factor for the growth of small service firms.

On size and growth of business firms

We study size and growth distributions of products and business firms in the context of a given industry. Firm size growth is analyzed in terms of two basic mechanisms, i.e., the increase of the number of new elementary business units and their size growth. We find a power-law relationship between size and the variance of growth rates for both firms and products, with an exponent between −0.17 and −0.15, with a remarkable stability upon aggregation. We then introduce a simple and general model of proportional growth for both the number of firm independent constituent units and their size, which conveys a good representation of the empirical evidences. This general and plausible generative process can account for the observed scaling in a wide variety of economic and industrial systems. Our findings contribute to shed light on the mechanisms that sustain economic growth in terms of the relationships between the size of economic entities and the number and size distribution of their elementary components.

Höheres Beschäftigungswachstum durch Venture Capital? / Does Venture Capital Affect New Firms' Growth?

Zusammenfassung Fragestellung des Papieres ist, ob junge Unternehmen durch die Inanspruchnahme einer Beteiligungsfinanzierung (Untersuchungsgruppe) eine bessere unternehmerische Performance erzielen können im Vergleich zu einer „repräsentativen" Menge von nicht mit Beteiligungskapital finanzierten Unternehmen (Kontrollgruppe). Da sich Beteiligungskapitalgeber bei ihren Investments an den zu erwartenden Wachstumsaussichten der Unternehmen orientieren, kann mit der zufälligen Auswahl von Unternehmen ohne Beteiligungsfinanzierung keine geeignete Kontrollgruppe gebildet werden. In der Mehrzahl der Studien wurden bisher nur wenige oder keine Determinanten berücksichtigt, um eine adäquate Kontrollgruppe auszuwählen. Eine Verzerrung des ausgewiesenen Beitrages der Beteiligungsfinanzierung zum unternehmerischen Wachstum ist daher nicht auszuschließen. In der vorliegenden Studie wird ein statistisches Evaluationsverfahren eingesetzt, um eine Kontrollgruppe zu bestimmen, welche in deutlich mehr beobachtbaren Charakteristika eine hinreichende Ähnlichkeit mit der Untersuchungsgruppe aufweist. Der anschließende Vergleich der Beschäftigungswachstumsraten zwischen der Untersuchungs- und Kontrollgruppe nach dem Matching zeigt, dass eine offene Beteiligung eines Beteiligungskapitalgebers zu einem höheren Wachstum junger Unternehmen in Deutschland führt. Die Beschäftigungswirkung fällt jedoch, verglichen mit den bisherigen Studien, deutlich geringer aus. Zudem sind einige branchen- und regionsspezifische Unterschiede offensichtlich.

The Business Cycle, Macroeconomic Shocks and the Cross Section: The Growth of UK Quoted Companies

In this paper we provide a new dimension to business cycle analysis, going beyond the traditional focus on the co-movements and correlations in macroeconomic aggregates. We bring to light a significant form of firm level heterogeneity over the business cycle. We analyse the responsiveness of firm growth (quoted UK companies, over the thirty year period to 1997) to business cycle movements and find that the effects of aggregate shocks, positive and negative, are more pronounced for firms in the middle range of growth. We show that the higher moments of the distribution of firm growth rates are significantly counter cyclical, and that this also follows from the fact that rapidly growing and rapidly declining firms are less sensitive to aggregate shocks than firms in the interior of the growth range. These findings are of importance in understanding firm growth as well as business cycle dynamics.

A stochastic model of firm growth

Recently from analyses on different databases the tent-shape of the distribution of firm growth rates has emerged as a robust and universal characteristic of the time evolution of corporates. We add new evidence on this topic and we present a new stochastic model that, under rather general assumptions, provides a robust explanation for the observed regularity.

R&D and the growth of firms: empirical analysis of a panel of Italian firms

This paper deals with the growth of firms and with their innovative activities. The main hypothesis of the paper maintains that firms with a strong commitment to R&D have a higher rate of growth because they succeed in the product market. After a review of the related literature, the paper presents an econometric analysis of the R&D-growth of firms relation based on a database of Italian firms. Data on a sample of 500 firms, with time series in the range 1989–1997, were drawn from the Mediocredito survey of Italian manufacturing. Descriptive analysis shows that the sales growth rate of firms with R&D is higher than that of firms without R&D. Econometric analysis is performed in two steps. First we apply a panel unit root test [Im, K., Pesaran, H., Shin, Y., 1997. Testing for Unit Roots in Heterogeneous Panels, DAE, University of Cambridge, Mimeo] to verify whether the firm size significantly affects firm growth. The test confirms Gibrat’s Law that firm size has a stochastic trend. Second, we explore whether there are variables with stochastic trends that could account for firm size. According to our estimates the growth rate of firms is positively correlated with research intensity. In these estimates, a further interesting result is that investment in ICT is not significant or shows a parameter with negative sign.

Firm Size and Growth in the United Kingdom Life Insurance Industry

AbstractThis study tests whether the organic growth rates of United Kingdom (UK) life insurance firms are independent of size, as predicted by Gibrat's (1931) Law of Proportionate Effects. Using data for 1987–1996 and the three subperiods, 1987–1990, 1990–1993, and 1993–1996, we find that smaller life insurance firms tended to grow faster than larger ones in the 1987–1990 period and that larger life insurers tended to grow faster than smaller ones in the 1990–1993 and 1993–1996 periods. But over the ten‐year period, we find no significant difference between the growth rates of small and large firms, thus supporting Gibrat's Law as a long‐run tendency in the UK life insurance industry. When we examine firm‐specific determinants of asset growth, we find evidence in 1987–1996 and 1987–1990 that more diversified life insurance firms experienced higher growth rates on average than more specialized life insurers. We also find that the growth of life insurance firms was related to input costs during the 1990–1993 and 1993–1996 subperiods.

IPOs and the Growth of Firms

Recent years have witnessed a rapid accumulation of empirical evidence documenting firm dynamics around the IPO date. A particularly striking finding is that operating performance, as measured by Returns on Assets for example, peaks in the fiscal year preceding the oering, worsens on impact at the IPO date, and keeps on declining for a few more years. In this paper, I provide a novel rationalization of this evidence. To this end, I construct a simple dynamic stochastic model of firm behavior in which the decision to go public is modelled explicitly. The model predicts that the operating performance reaches its peak in the period before the oering and experiences a sudden decline at the IPO date. The comparative advantage of my approach is that it produces further implications that are in line with the data. Most importantly, the model predicts that the IPO coincides with an increase in sales and capital expenditures. Consistently with evidence pointed out by the Industrial Organization literature, the firm growth rate is shown to be decreasing in age and size.

The variance of firm growth rates: the ‘scaling’ puzzle

Recent evidence suggests that a power-law relationship exists between a firm's size and the variance of its growth rate. The flatness of the relation is regarded as puzzling, in that it suggests that large firms are not much more stable than small firms. It has been suggested that the power-law nature of the relationship reflects the presence of some form of correlation of growth rates across the firm's constituent businesses. Here, it is shown that a model of independent businesses which allows for the fact that these businesses vary in size, as modelled by a simple ‘partitions of integers’ model, provides a good representation of what is observed empirically.

Accounting Returns Revisited: Evidence of their Usefulness in Estimating Economic Returns

Shareholders, managers, and researchers rely on estimates of a firm's past investment returns when evaluating its performance, and estimating its value. In this paper, we revisit the question of whether accounting rates of return (ARR)-computed from financial statement data-are appropriate surrogates for a firm's realized internal rate of return (IRR). Although some authors argue accounting numbers are useless for this purpose, many managers and researchers employ accounting returns as a measure of firm profitability. We derive a model showing that a firm's ARR and historical growth rate define the range in which its IRR on past investments is likely to fall. Using panel data, we find ARR is close to IRR for a large number of firms. In addition, we identify conditions under which a firm's ARR is likely to be a misleading proxy for IRR. Given the theoretical relation we derive between ARR and IRR and the empirical linkage we observe, previous research results demonstrating the value relevance of accounting information are predictable.

Gibrat's Law: Are the Services Different?

Several noted surveys on intra-industry dynamics have reached the conclusion from a large body of evidence that Gibrat's Law does not hold. However, almost all of these studies have been based on manufacturing or large scale services such as banking and insurance industries. There are compelling reasons to doubt whether these findings hold for small scale services such as the hospitality industries. In this paper we examine whether the basic tenet underlying Gibrat's Law– that growth rates are independent of firm size – can be rejected for the services as it has been for manufacturing. Based on a large sample of Dutch firms in the hospitality industries the evidence suggests that in most cases growth rates are independent of firm size. Validation of Gibrat's Law in some sub-sectors of the small scale services suggests that the dynamics of industrial organization for services may not simply mirror that for manufacturing. The present paper includes a survey of nearly 60 empirical studies on firm growth rates.

International R&D Spillovers: An Empirical Study

The existence of R&D spillovers or externalities i.e. the effects of firms' research activities on others firms activities was theoretically established by Arrow 1962a, but few empirical studies have addressed their effects on firm's economic performance ( i.e. productivity growth) and technological performance. In an open economy, firms' economic and technological performance depends on the position of these firms in their national and international technological environment. The main focus of this paper is on identifying the different channels through which international technology spillovers occurs between firms. Our statistical and econometric analysis determine that spillovers drive the productivity growth rates of individual firms. Thus, using a pooling method based on segmentation of bunched (or grouped by industry) individuals rather than those of usual individuals panel models, this empirical study shows that the international spillovers account for a substantial fraction of the variation in firm productivity growth. The estimated coefficients obtained for the classical variables (R&D and Human capital) are comparable to those obtained in the literature.

The Accuracy and Bias of Equity Values Inferred from Analysts' Earnings Forecasts

We evaluate the extent to which unbiased and accurate estimates of equity value can be derived from three multiperiod accounting-based valuation models using consensus analysts' earnings forecasts over a four-year horizon. The models are (1) the earnings capitalization model, (2) the residual income model without a terminal value, and (3) the residual income model with a terminal value that assumes residual income will grow beyond the horizon at a constant rate determined from the expected residual income growth rate over the forecast horizon. Our analysis is based on valuation errors that are calculated by comparing estimated prices to actual prices. We find that, on average, analysts' earnings forecasts convey information about value beyond that conveyed by current earnings, book values, and dividends. Each of the models that we used has valuation errors that decline monotonically as the horizon increases, implying that earnings forecasts at each horizon convey new value relevant information. We cannot find a clear advantage to using firm specific growth rates instead of a constant rate of 4 percent across all sample firms. In addition, only 17 percent of the imputed growth rates could be used in terminal value calculations. The residual income model with a terminal value shows the best performance on average, but it values more accurately only 48 percent of our sample firms. The earnings capitalization model and the residual income model without a terminal calculation value more accurately 18 percent and 13 percent of the sample firms, respectively. The remaining 21 percent of firms are more accurately valued using only reported current earnings and book values of equity. Thus, different models are appropriate for different firms. The conditions under which given models work best relate to ex-ante growth indicators such as the current book-to-market, earnings-to-price, the present value of the expected residual income over the forecast horizon, the growth rate in expected earnings, and firm size, but not to industry membership. In all models estimated prices are, on average, downward biased and inaccurate and they explain at best 70 percent of the variation in market prices. We examined the quality of the earnings forecasts and the quality of the GAAP earnings as two possible reasons for the biased and inaccurate results. Our tests provide evidence consistent with both of these reasons. Thus, we conclude that the poor model performance is due to information missing from the forecasts and to the practice of conservative accounting.

PERSONAL INCOME TAXES AND THE GROWTH OF SMALL FIRMS

This paper investigates the effect of entrepreneurs' personal income tax situations on the growth rates of their enterprises. We analyze the personal income tax returns of a large number of sole proprietors before and after the Tax Reform Act of 1986 and determine how the substantial reductions in marginal tax rates associated with that law affected the growth of their firms as measured by gross receipts. We find that individual income taxes exert a statistically and quantitatively significant influence on firm growth rates. Raising the sole proprietor's tax price (one minus the marginal tax rate) by 10 percent increases receipts by about 8.4 percent. This finding is consistent with the view that raising income tax rates discourages the growth of small businesses.

THE GROWTH DYNAMICS OF GERMAN BUSINESS FIRMS

We determine the distribution of size and growth rates of German business firms in 1987–1997. We find a log-normal size distribution. The distribution of growth rates has fat tails. It can be fitted to an exponential in a narrow central region and is dominated by finite-sample-size effects far in its wings. We study the dependence of the growth rate distribution on firm size: depending on procedures, we find almost no dependence when the center of the distribution is considered or, similar to previous work, a power-law when the wings are weighted more strongly. Correlations in the growth of different firms are essentially random. We determine the annual growth of the entire economy, and successfully correlate it with a standard economic indicator of business cycles in Germany. We emphasize possible problems related to the finite number of firms comprised in our database and its short extension in time.

On the Growth of Micro and Small Firms: Evidence from Sweden

The relationship between the size, age and growth rate of firms is examined for a large sample of micro and small firms in Sweden. These firms have between 1-100 employees and operate in a geograph ...

Personal Income Taxes and the Growth of Small Firms

This paper investigates the effect of entrepreneurs' personal income tax situations on the growth rates of their enterprises. We analyze the personal income tax returns of a large number of sole proprietors before and after the Tax Reform Act of 1986 and determine how the substantial reductions in marginal tax rates associated with that law affected the growth of their firms as measured by gross receipts. We find that individual income taxes exert a statistically and quantitatively significant influence on firm growth rates. Raising the sole proprietor's tax price (one minus the marginal tax rate) by 10 percent increases receipts by about 8.4 percent. This finding is consistent with the view that raising income tax rates discourages the growth of small businesses.

Managerial opportunism and the capital structure decisions of property companies

The focus of this paper is on the problem of managerial opportunism in the corporate governance of UK quoted property companies. Agency conflicts exist between firm managers and owners because of the separation of ownership from management. Consequently, managers pursue activities that enhance their interests rather than that of the shareholders’. The empirical investigation of this paper is divided into two sections. The first part examines the ownership structure of 83 UK quoted property companies between 1989 and 1995, revealing that close to a quarter of the common shares issued by the companies are held by the managers. The gap between ownership and management appears to increase with firm size, risk and growth rate but decrease with corporate performance. In the second section, logit modeling is employed to examine 110 security issues of the companies during the study period. The evidence shows that ownership structure has an influence on the debt‐equity choice of property companies. Consistent with the findings of previous studies, the study also reveals that the capital structure choice is dictated to a large extent by company size, issue size, and condition of the security market. The empirical analysis also suggests that property companies make their financing decisions as though they have a target capital structure in mind.