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Growing profitable or growing from profits: Putting the horse in front of the cart?

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  • Davidsson, Per
  • Steffens, Paul
  • Fitzsimmons, Jason
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    Abstract

    Firm growth is almost universally portrayed as a good thing, and is commonly used as a measure of success. Applying resource-based reasoning, we argue that growth is often not a sign of sound development. Specifically, we hypothesize that firms which grow without first securing high levels of profitability tend to be less successful in subsequent periods compared to firms that first secure high profitability at low growth. Empirical tests using two large, longitudinal data sets confirm that the profitable low growth firms are more likely to reach the desirable state of high growth and high profitability. In addition, they have a decreased risk of ending up performing poorly on both performance dimensions compared with firms starting from a high growth, low-profitability configuration. The results suggest that academics, managers, investors and policy-makers may benefit by adopting a more nuanced view of firm growth that explicitly incorporates its intricate relationship with profitability.

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    File URL: http://www.sciencedirect.com/science/article/B6VDH-4SJGWP0-1/2/458dd64494527ef0e65bc49794be87e4
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Business Venturing.

    Volume (Year): 24 (2009)
    Issue (Month): 4 (July)
    Pages: 388-406

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    Handle: RePEc:eee:jbvent:v:24:y:2009:i:4:p:388-406

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    Web page: http://www.elsevier.com/locate/jbusvent

    Related research

    Keywords: Growth Profitability Success Performance Resource-Based View;

    References

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    1. Cliff, Jennifer E. & Jennings, P. Devereaux & Greenwood, Royston, 2006. "New to the game and questioning the rules: The experiences and beliefs of founders who start imitative versus innovative firms," Journal of Business Venturing, Elsevier, vol. 21(5), pages 633-663, September.
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    12. Alvarez, Sharon A. & Barney, Jay B., 2004. "Organizing rent generation and appropriation: toward a theory of the entrepreneurial firm," Journal of Business Venturing, Elsevier, vol. 19(5), pages 621-635, September.
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    Citations

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    Cited by:
    1. Nuri Yildirim, 2011. "No Appealing Future For High Growth – Low Profitability Firms: Evidence from Turkey’s Top 1000," Working Papers 2011/2, Turkish Economic Association.
    2. Coad, Alex & Frankish, Julian & Roberts, Richard G. & Storey, David J., 2013. "Growth paths and survival chances: An application of Gambler's Ruin theory," Journal of Business Venturing, Elsevier, vol. 28(5), pages 615-632.
    3. Rosenbusch, Nina & Brinckmann, Jan & Müller, Verena, 2013. "Does acquiring venture capital pay off for the funded firms? A meta-analysis on the relationship between venture capital investment and funded firm financial performance," Journal of Business Venturing, Elsevier, vol. 28(3), pages 335-353.
    4. Eggers, Fabian & O’Dwyer, Michele & Kraus, Sascha & Vallaster, Christine & Güldenberg, Stefan, 2013. "The impact of brand authenticity on brand trust and SME growth: A CEO perspective," Journal of World Business, Elsevier, vol. 48(3), pages 340-348.
    5. Douglas, Evan J., 2013. "Reconstructing entrepreneurial intentions to identify predisposition for growth," Journal of Business Venturing, Elsevier, vol. 28(5), pages 633-651.
    6. Moriah Meyskens & Alan Carsrud, 2013. "Nascent green-technology ventures: a study assessing the role of partnership diversity in firm success," Small Business Economics, Springer, vol. 40(3), pages 739-759, April.

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