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Bursting into life: firm growth and growth persistence by age

Abstract

Is firm growth more persistent for young or old firms? Theory gives us no clear guidance, and previous empirical investigations have been hampered by a lack of detailed data on firm age, as well as a non-representative coverage of young firms. We overcome these shortcomings using a rich dataset on all limited liability firms in Sweden during 1998–2008, covering firms of all ages and information on registered start year. Sales growth for new ventures is characterized by positive persistence, which quickly turns negative as firms get older. Young firms are more likely to have two consecutive periods of positive growth. While new firms experience an early burst of sustained growth, older firms have more erratic growth paths.

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Notes

  1. In fact, this was already emphasized by Fizaine (1968) when investigating the growth of establishments in the French region of Bouches-du-Rhône.

  2. This latter approach to determine a firm’s age is still highly accurate, but it means that for older firms our age variable cannot account for the possibility that a firm has changed the periodicity of their split financial year and consequentially measure age with a possible error of at most ±1 year.

  3. These integer restrictions affecting employment growth data are particularly problematic for the computation of quantile regressions. In a further robustness analysis, however, we apply OLS regressions to employment growth data, and the results obtained were similar in that the autocorrelation coefficient is highest in the early years and quickly decreases (although for most ages, the autocorrelation coefficient was not clearly negative but close to zero).

  4. For simplicity, we overlook the fact that the exponential is a continuous distribution whereas our age data is discrete.

  5. In 1975, Sweden increase the minimum amount of capital required to start an incorporation from 5000 SEK to 50,000 SEK. This amount was increased once more in 1995 from 50,000 SEK to 100,000 SEK. Firms that registered prior to January 1 in 1995 were exempt from increasing the equity to 100,000 SEK until 1998. The reason we still see an increase in 1995 (until the last of July) is because a newly registered company had a 6-month period to have a first statutory meeting of the board. This means that a firm could have a registration date in June of 1995, but still qualify for 50,000 SEK in equity. As for the increase observed in the month of July, it is due to the registration of a large number of so-called shelf-companies.

  6. The mode is not reported here, because the distribution is multimodal.

  7. Growth is calculated as a function of both size at time t, and size at time t-1; hence, the first observation for growth is in year 2.

  8. Since the distribution of age is skewed, using the mean instead of the median could be problematic if there are firms with high age in a grid-box that otherwise contains mostly young firms.

  9. Since median age is computed with different numbers of observations over the grid, the densities in Figure 6 are therefore weighted giving more weights to cells in the grid that contains more observations. The weights are constructed by counting the number of observations in each grid-box over which the median age is computed. The resulting counts are then entered as analytical weights [aweights] in the contour plot.

  10. All median regression estimations are performed in Stata using the qreg with the vce(robust) option. Bootstrapping our standard errors was not a viable option due to the numerous regressions undertaken at each age.

  11. Since we are interested in the effect on growth rates, we consider the marginal effect on growth t from a unit change in growth t − 1 instead of the elasticity defined as the percentage effect change on size i , t /size i , t − 1 from a percentage change in size i , t − 1/size i , t − 2.

  12. Excluding the age variable from the regression doubles the estimated coefficient on initial growth (not reported). Still not a strikingly high level of autocorrelation, but it suggests some form of relationship between the two variables.

  13. Strictly speaking younger than 5 years are firms between 2 and 4 years old since the youngest firm with at least two observed consecutive growth rates is 2 years old (counted as 0 in 2006 when it was founded).

  14. All results are available from the authors upon request.

  15. In 2008, we observed in Figure 3 that the growth dynamic of young firms between 2 and 4 years were characterized by positive autocorrelation. Following the peak of dot-com crises in 2001, positive autocorrelation could only be observed for firms of 2 years. For every other year, positive autocorrelation rates were observed for the median firm the first 2 or 3 years in its life.

  16. For 2008 autocorrelation turned negative and significant for firms of 16 years and remained negative until firms aged 21 years, but for 2002, the negative period took place between ages 9 and 13.

  17. Note however that notions of an “optimal size” for firms have been repeatedly rejected in the empirical literature (Coad 2009, pp100–101).

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Acknowledgements

We would like to thank Michael Anyadike-Danes, Jean Bonnet, Anders “Billy” Bornhall, Martin Carree, Marc Cowling, Michaela Niefert, the editor (Christina Guenther), two anonymous reviewers, and participants at ZEW (Mannheim), BCERC 2014 (London, Ontario) and Conférence Forum Innovation VI (Paris, France) for valuable comments and suggestions. The usual caveat applies.

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Correspondence to Alex Coad.

Appendix

Appendix

Table 5 Description of sales growth by age categories for three different employment-size categories (2008)
Table 6 Description of average size in terms of number of employees by the preferred sample of firms across age categories in 2008
Table 7 Results from median regression on firms divided by size group

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Coad, A., Daunfeldt, SO. & Halvarsson, D. Bursting into life: firm growth and growth persistence by age. Small Bus Econ 50, 55–75 (2018). https://doi.org/10.1007/s11187-017-9872-8

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Keywords

  • Firm age
  • Growth rate autocorrelation
  • Sales growth
  • Growth persistence
  • Learning-by-doing
  • Minimum efficient scale
  • Growth paths

JEL Classification

  • D22
  • L25
  • L26