2011/01  LEM Working Paper Series  
Framing the empirical findings on firm growth 

Marco Capasso, Elena Cefis, Sandro Sapio 

Keywords  
Firm growth; Law of Proportionate Effect; quantile regression; heterogeneity; variancesize scaling.


JEL Classifications  
L11; L25; L60


Abstract  
This paper proposes a general framework to account for the divergent
results in the empirical literature on the relation between firm sizes
and growth rates, and on many results on growth autocorrelation. In
particular, we provide an explanation for why traces of the LPE
sometimes occur in conditional mean (i.e. OLS) autoregressions of firm
size or firm growth, and in conditional median (i.e. least absolute
deviation) autoregressions, but never in high or low quantile
autoregressions. Based on an original empirical analysis of the
population of manufacturing firms in the Netherlands between 1994 and
2004, we find that there is no peculiar role played by the median of
the growth distribution, which is approximately equal to zero
independent of firm size. In economic terms, this is equivalent to
saying that most of the phenomena of interest for industrial dynamics
can be studied without reference to the behaviour of the median firm,
and many "average" relations retrieved in the literature, starting
from the negative relation between average size and average growth,
are driven by the few dynamic firms in the sample rather than the many
stable ones. Moreover, we observe the tent shape of the empirical
firm growth rate distribution and confirm the skewnesssize and the
variancesize relations. The identified quantile regression patterns 
autoregressive coefficients above 1 for fast decliners, and below 1
for fast growers  can be obtained by assuming negative variancesize
scaling and Laplace growth rate distributions, and are robust to a
mild positive relationship between skewness and size. A relationship
between quantile regression patterns and previous findings is
therefore uncovered.


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