The heterogeneous dynamics between growth and profits: the case of young firms
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While there is an increasing interest in the literature about the relationship between profits and business growth, the empirical evidence is mixed and inconclusive. This can be explained by the difficulty of fully addressing the complex nature of this relationship. Building on resource-based and evolutionary considerations, the present study investigates the dynamics between growth and profits of young firms by explicitly considering the endogeneity and heterogeneity aspects of the relationship. Data are based on a cohort of Spanish manufacturing firms tracked during the period 1996–2010. The results indicate that young firm growth has a positive impact on profits. In contrast, the effect of profits on growth is not significant. Neither is there a significant correlation between past and current growth. Importantly, we find that the results are strongly influenced by inter-firm heterogeneity. Implications from these findings are discussed.
KeywordsYoung firms Firm growth Profits System GMM Endogeneity Heterogeneity
JEL ClassificationsL25 L26 M13
We want to express our gratitude to Luis Trajtenberg, Gabriel Montes-Rojas and Walter Sosa Escudero for their useful comments on the econometric analysis. Also, we want to thank Christophe Hurlin, Erkan Erdil and Irwin Morris for sharing their routines and commands, and the attendees at the SIDPA Seminar—Faculty of Economics, University of Buenos Aires for their valuable comments. We appreciate the support from Associate Editor Alexander Kritikos and the valuable comments from two anonymous referees. Support from the Spanish Ministry of Science and Technology is also acknowledged (Project ECO2010-21242-C03-01). The authors are jointly responsible for the work. The usual disclaimer applies.
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