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Firm Size and Growth Rate Variance: the Effects of Data Truncation

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  • M. Capasso
  • E. Cefis

Abstract

This paper discusses the effects of the existence of natural and/or exogenously imposed thresholds in firm size distributions, on estimations of the relation between firm size and variance in firm growth rates. We explain why the results in the literature on this relationship are not consistent. We argue that a natural threshold (0 number of employees or 0 total sales) and/or the existence of truncating thresholds in the dataset, can lead to upwardly biased estimations of the relation. We show the potential impact of the bias on simulated data, suggest a methodology to improve these estimations, and present an empirical analysis based on a comprehensive dataset of Dutch manufacturing and service firms. The only stable relation between firm size and growth rate variance is negative regardless of how we define the measure of firm growth.

Suggested Citation

  • M. Capasso & E. Cefis, 2010. "Firm Size and Growth Rate Variance: the Effects of Data Truncation," Working Papers 10-23, Utrecht School of Economics.
  • Handle: RePEc:use:tkiwps:1023
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    File URL: https://dspace.library.uu.nl/bitstream/handle/1874/309380/10_23.pdf
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    References listed on IDEAS

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    1. Giulio Bottazzi & Alex Coad & Nadia Jacoby & Angelo Secchi, 2011. "Corporate growth and industrial dynamics: evidence from French manufacturing," Applied Economics, Taylor & Francis Journals, vol. 43(1), pages 103-116.
    2. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March.
    3. Giulio Bottazzi & Angelo Secchi, 2003. "Common Properties and Sectoral Specificities in the Dynamics of U.S. Manufacturing Companies," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 23(3_4), pages 217-232, December.
    4. Nunes Amaral, Luís A & Buldyrev, Sergey V & Havlin, Shlomo & Maass, Philipp & Salinger, Michael A & Eugene Stanley, H & Stanley, Michael H.R, 1997. "Scaling behavior in economics: The problem of quantifying company growth," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 244(1), pages 1-24.
    5. Giulio Bottazzi & Angelo Secchi, 2006. "Explaining the distribution of firm growth rates," RAND Journal of Economics, RAND Corporation, vol. 37(2), pages 235-256, June.
    6. Alex Coad & Werner Hölzl, 2009. "On the Autocorrelation of Growth Rates," Journal of Industry, Competition and Trade, Springer, vol. 9(2), pages 139-166, June.
    7. Alex Coad, 2007. "A Closer Look at Serial Growth Rate Correlation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 31(1), pages 69-82, August.
    8. Christopher F Baum, 2006. "An Introduction to Modern Econometrics using Stata," Stata Press books, StataCorp LP, number imeus, November.
    9. Stephen Hymer & Peter Pashigian, 1962. "Firm Size and Rate of Growth," Journal of Political Economy, University of Chicago Press, vol. 70, pages 556-556.
    10. Giulio Bottazzi & Elena Cefis & Giovanni Dosi, 2002. "Corporate growth and industrial structures: some evidence from the Italian manufacturing industry," Industrial and Corporate Change, Oxford University Press, vol. 11(4), pages 705-723, August.
    11. M. Ruth & K. Donaghy & P. Kirshen, 2006. "Introduction," Chapters,in: Regional Climate Change and Variability, chapter 1 Edward Elgar Publishing.
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    Cited by:

    1. Marco Capasso & Tania Treibich & Bart Verspagen, 2015. "The medium-term effect of R&D on firm growth," Small Business Economics, Springer, vol. 45(1), pages 39-62, June.
    2. Marco Capasso & Elena Cefis & Alessandro Sapio, 2013. "Reconciling quantile autoregressions of firm size and variance–size scaling," Small Business Economics, Springer, vol. 41(3), pages 609-632, October.
    3. Fabio Pieri, 2015. "Vertical organization of production and firm growth behavior," Working Papers 1508, Department of Applied Economics II, Universidad de Valencia.
    4. Fabio Pieri, 2016. "Vertical organization of production and firm growth," DEM Working Papers 2016/01, Department of Economics and Management.
    5. Murmann Johann Peter & Korn Jenny & Worch Hagen, 2014. "How Fast Can Firms Grow?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 234(2-3), pages 210-233, April.

    More about this item

    Keywords

    firm’s growth; growth rates variance; truncation; thresholds; Ordered by external client;

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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