Firm Size and Growth Rate Variance: The Effects of Data Truncation

Abstract

This paper discusses the effects of the existence of natural and/or exogenously imposed thresholds in firm size distributions on estimations of the relation between firm size and the variance in firm growth rates. We argue that these estimations are upwardly biased whenever the threshold operates on the same proxy that is used to calculate the growth rates. We show the potential impact of the bias on simulated data, suggest a methodology to improve these estimations, and present an empirical analysis on Dutch firms. The only stable relation that emerges is the negative relationship between firm size and growth rate variance.

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Acknowledgments

The authors thank Lawrence J. White (general editor), two anonymous referees, Andrew Bernard, Koen Frenken, and the participants at the DIME Workshop on “The dynamics of firm evolution: productivity, profitability and growth”, Pisa, 3–4 October 2008. The empirical work was carried out at the Centre for Research of Economic Microdata at Statistics Netherlands (CBS). The views expressed in this paper are those of the authors and do not necessarily reflect the policies of Statistics Netherlands. The authors thank Gerhard Meinen and on-site staff of CBS for their collaboration. This work was supported by Utrecht University [High Potential Grant (HIPO) to E. Cefis and K. Frenken]; and the University of Bergamo [grant ex 60 %, n. 60CEFI11, Department of Economics, to E. Cefis].

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Correspondence to Elena Cefis.

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Open Access This article is distributed under the terms of the Creative Commons Attribution 2.0 International License (https://creativecommons.org/licenses/by/2.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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Capasso, M., Cefis, E. Firm Size and Growth Rate Variance: The Effects of Data Truncation. Rev Ind Organ 41, 193–205 (2012). https://doi.org/10.1007/s11151-012-9350-z

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Keywords

  • Firm growth
  • Growth rate variance
  • Thresholds
  • Truncation

JEL Classification

  • L25
  • C21