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How Do Firms Choose Between Growth and Efficiency?

Author

Listed:
  • Laurent Frésard

    (Universita della Svizzera italiana; Swiss Finance Institute)

  • Loriano Mancini

    (Universita della Svizzera italiana; Swiss Finance Institute)

  • Enrique J. Schroth

    (EDHEC Business School; CEPR)

  • Davide Sinno

    (Universita della Svizzera italiana; Swiss Finance Institute)

Abstract

This paper explores the relation between firms’ growth and efficiency. To measure it, our approach treats productive efficiency as a deliberate choice made by firms, as opposed to taken as given by the firm and estimated as a residual. In our model, firms choose capital and labor jointly with effort to make these inputs more productive. Fitting the model to the data, we obtain granular estimates of firms’ unobservable efficiency and find that young firms prioritize growth, while older firms focus more on efficiency. Over time, firms tend to shift their emphasis towards efficiency. Among young firms, those that pursue high growth tend to achieve higher markups, but also face a greater risk of failure. Our analysis sheds light on the factors that influence firms’ growth and efficiency strategies and their implications.

Suggested Citation

  • Laurent Frésard & Loriano Mancini & Enrique J. Schroth & Davide Sinno, 2023. "How Do Firms Choose Between Growth and Efficiency?," Swiss Finance Institute Research Paper Series 23-37, Swiss Finance Institute, revised Jun 2023.
    • Handle: RePEc:chf:rpseri:rp2337
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    More about this item

    Keywords

    Efficiency; growth; short-term effort; investment; estimation;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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