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The heterogeneous dynamics between growth and profits: the case of young firms

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  • Juan Federico

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  • Joan-Lluis Capelleras

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Abstract

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. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Juan Federico & Joan-Lluis Capelleras, 2015. "The heterogeneous dynamics between growth and profits: the case of young firms," Small Business Economics, Springer, vol. 44(2), pages 231-253, February.
  • Handle: RePEc:kap:sbusec:v:44:y:2015:i:2:p:231-253
    DOI: 10.1007/s11187-014-9598-9
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    Cited by:

    1. Giovanni Dosi & Emanuele Pugliese & Pietro Santoleri, 2017. "Growth and survival of the `fitter'? Evidence from US new-born firms," LEM Papers Series 2017/06, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    2. repec:kap:sbusec:v:50:y:2018:i:2:d:10.1007_s11187-016-9827-5 is not listed on IDEAS
    3. Habermann, Harald, 2017. "Business takeovers and firm growth: Empirical evidence from a German panel," Working Papers 01/17, Institut für Mittelstandsforschung (IfM) Bonn.

    More about this item

    Keywords

    Young firms; Firm growth; Profits; System GMM; Endogeneity; Heterogeneity; L25; L26; M13;

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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