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Firm age: a survey

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Abstract

This survey paper synthesizes theory and evidence on processes of firm-level aging. We discuss why anthropomorphic analogies are not helpful for understanding firm aging, because of differences in population pyramid shapes (with around 50 % of firms exiting after just 3 years), no upper bound on firm ages, and no deterministic change in performance with firm age. We discuss the liabilities of newness, adolescence, and senescence and obsolescence, and define what we mean by the direct and indirect causal effects of age. Our causal model also helps clarify previous confusion about why controlling for size in regressions of firm age on survival can reverse the results (Simpson’s paradox and the ‘bad control’ problem). While aging processes can occur at many levels (employee-level, firm-level, cohort-level, etc.), we focus on the firm-level. We summarize empirical work on firm age and conclude that the most interesting age effects occur within the first 5–7 years, which underscores the importance of datasets that do not under-represent young firms.

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Notes

  1. http://www.guinnessworldrecords.com, last accessed 1st December 2014.

  2. This suggests the interesting conjecture that older CEOs might have less ambitious growth strategies than their younger counterparts.

  3. Another possible ‘stage’ in the aging of firms might be the necessary replacement of a founding entrepreneur or CEO after a certain amount of time (Cucculelli 2014), or turbulence due to the obsolescence of initial endowments (Agarwal and Gort 2002). This effect might be dwarfed by other organizational changes such as employment growth and the introduction of new hierarchical layers, however.

  4. Neither would it be a fair test to look at the effects of age on performance, while ‘holding constant’ all the negative effects of age (e.g. inertia, senescence, poor fit to the market environment), but without controlling for the advantages of age (such as size). By controlling away the drawbacks of age, but not the advantages, this would introduce a positive bias into the estimated effects of age on performance.

  5. I am grateful to an anonymous reviewer for this suggestion.

  6. See for example the discussion in Mazzucato and Parris (2015, p167), who challenge the results by Haltiwanger et al. (2013) regarding young firm growth, although they have a rather different age indicator.

  7. Higher values for the ‘half-life’ of firms, or the median age at death for firms, that may have been found in other studies, are presumably due to under-representation of short-lived, young firms (see the discussion in Yang and Aldrich 2012, p479).

  8. In fact, Greiner begins by presenting his stages of growth model in the context of stages of aging before discussing stages of growth (see Greiner 1998, p56).

  9. One might see an interesting parallel with human aging here – in human cohorts, the variance in health increases with age (Whalley 2001, p85).

  10. Not everyone would agree that with this latter quote, however – Huynh and Petrunia (2010) observe that, conditional on age, firm growth remains negatively related to size.

  11. One may also conjecture that the age-pay structure could be a consequence of the particular institutional frameworks in place at the time of firm formation (e.g., stronger roles of unions in older firms). I am grateful to an anonymous reviewer for this suggestion.

  12. One might therefore conjecture that it takes longer for the exit rate to decrease and reach a stable value for certain (high-tech) industries where firms require complex higher-level capabilities.

  13. In the case of family firms, one would expect a higher rate of failed transformations brought about by the change of leadership, than in the case of large corporations with established monitoring mechanisms and shareholder pressure.

  14. E.g. from a large parent firm to a new small firm that has been set up in a different location with different employees, a different product, and a different target market.

  15. For example, to be counted as a bona fide new firm, there should be not only a change of name, but also a change of ownership, a change of industry, a significant change in the identity of the employees, and perhaps also a change of address.

  16. Note however the doubts about the effectiveness of entrepreneurship training programmes that are found in the empirical literature (e.g. Fairlie et al. 2015; Coad et al. 2015).

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Acknowledgements

I am very much indebted to Martin Andersson, Giulio Bottazzi, Martin Carree, Tommaso Ciarli, Olof Ejermo, Micheline Goedhuys, Marco Grazzi, Jacob Rubaek Holm, Michiko Iizuka, Erik Lundmark, Ben Martin, David Storey, Federico Tamagni, Rocio Alvarez Tinoco, Antonio Vezzani, and seminar participants at GCW 2014 (Turin), SPRU (University of Sussex, UK), CIRCLE (Lund, Sweden) and Maastricht University, as well as Uwe Cantner (the Editor) and two anonymous reviewers. The usual disclaimer applies.

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Correspondence to Alex Coad.

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The views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the European Commission.

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Coad, A. Firm age: a survey. J Evol Econ 28, 13–43 (2018). https://doi.org/10.1007/s00191-016-0486-0

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  • DOI: https://doi.org/10.1007/s00191-016-0486-0

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