Search results

This paper aims to investigate the relationship between firm size and growth under the framework of Law of Proportionate Effect (LPE) for Asian firms.

An unbalanced panel data for about 12,001 unique non-financial listed and active firms from 1995 to 2016 for 12 industrial and emerging Asian economies was examined. Total assets and net sales were used as size variables. Firm-specific variables such as return on equity, leverage and liquidity ratio were used along with macroeconomic variables such as GDP growth and two financial development indicators. The fixed effects and random effects approach were used to estimate the dynamic growth model after taking into account econometric issues such as correlation between the cross-country-specific error component and the regressors and heteroscedasticity.

The estimated coefficient of firm size was found to be always significant and negative rejecting the Gibrat’s law for Asian firms confirming that the small-sized firms are growing faster than larger-sized firms. Also, the persistence of growth coefficient suggested that a positive persistence of firm growth does not exist for the selected Asian firms. Gibrat’s LPE was also rejected across small, medium- and large-sized companies. For the aggregate sample, the coefficient of leverage was found to be negative and significant, whereas liquidity ratio, GDP growth, banking sector and stock market variables are found to have positive and significant relationship with growth of firms. For individual economies, a mix of positive and negative (significant and insignificant) estimated coefficient was observed.

At macro-level, the examination of firm growth is likely to have significant policy implications for the regulators and various government agencies as firm growth may increase economic activity in general and employment opportunities in particular. The policymakers can control economic and employment activity by designing specific firm growth policies. At micro-level, the study will have significant implications for managerial decision-making.

To the best of the authors’ knowledge, this is one of the first studies to test the validity of Gibrat’s LPE for large Asian economies and firms using recent data under a dynamic growth framework using firm-specific and macroeconomic variables. Also, persistence of growth of firms under LPE (that growth does not persist from one period to the next) is uniquely examined for Asian firms.

The hypothesis that the percentage growth rates of firms over a certain period of time are independent of their initial sizes — the Law of Proportionate Effect, alias Gibrat's Law — has attracted the attention and stimulated the efforts of a great number of economists. This is due to several striking implications of the Law. Firstly, “if such a law of proportionate growth held without any restriction the consequence would be a continual increase in the dispersion of the sizes, that is to say, the concentration of industry would increase over time” (Hart and Prais, 1956, p. 171). Secondly, “if the law was confirmed … it would suggest that there was no optimum size of firm from the point of view of growth since all sizes of firm were equally likely to benefit from growth” (Pickering, 1974, p. 116). Thirdly, “it would be very difficult to adopt a deterministic explanation of the growth of firms” (Pickering, 1974, pp. 116–7), since according to the Law, growth is a purely stochastic phenomenon that arises from the cumulative effect of the random operation of a large number of factors acting independently of each other. Lastly, “there will be no continuity in the growth pattern of firms” (Eatwell, 1971, p. 402). This means that the growth rate of a firm in a certain period has no influence on the growth rate in subsequent periods.

This article explores the size‐growth relationship for a panel of large US credit unions, using the panel unit root tests of Im et al. (2003) and Maddala and Wu (1999). The reference point is Gibrat’s Law, or the Law of Proportionate Effect, according to which firm growth rates are independent of firm sizes. The panel unit root tests are applied to the log as sets and log membership series of a sample of 997 surviving credit unions which reported data over the period 1993 to 2002. In each case the panel unit root tests fail to reject the null hypothesis of non‐stationarity in the logarithmic size series for all credit unions. The implication is that credit union sizes follow random walks, producing a tendency for industry concentration to increase in the long term. With many of the largest institutions currently offering portfolios of products and services similar to those of commercial banks and other financial institutions, these implications of the panel unit root test results appear consistent with observed patterns within the sector in recent years.

Gibrat's Law of Proportionate Effect is reconsidered by assuming a process of stochastic growth and decline of firms in an industry. With the assistance of computer simulations it is shown that such a process leads to an even more skewed size distribution of firms than a random process of growth only.

Research on high-growth firms (HGFs) or gazelles is expanding due to their significant contribution to job growth and economic development. However, the knowledge about the conditions and factors that set these firms on their rapid growth trajectory remains fragmented. Therefore, this chapter provides an abreast inventory of the surging gazelle studies by systematically reviewing the international gazelle growth literature and consolidating firm-level, industry-level, and macroeconomic-level growth factors and their interactions as elaborated in the studies. Based on the review of 62 international empirical studies, this chapter finds that the gazelle growth is complex and multidimensional in its scope and nature. The firm’s growth intention and entrepreneurial nature emerge as necessary but not sufficient conditions to guarantee rapid growth as it results from the impact of and interaction between various firm-level and external factors. The different growth-influencing factors are summarized using a theoretical gazelle growth model, which supports the rare and temporal nature of the gazelle growth.

Purpose: In reality, financial decisions are made under conditions of asymmetric information that results in either favorable or adverse selection. As far as financial decisions affect growth of the firm, the latter must also be affected by either favorable or adverse selection. Therefore, the core objective of this chapter is to examine the determinants of each financial decision and the effects on growth of the firm under conditions of information asymmetry.

Design/Methodology/Approach: This chapter uses data for the non-financial firms listed in S&P 500. The data cover quarterly periods from 1989 to 2014. The statistical tests include linearity, fixed, and random effects and normality. The generalized method of moments estimation method is employed in order to examine the relative significance and contribution of each financial decision on growth of the firm, respectively. Standard and proposed proxies of information asymmetry are discussed.

Findings: The results conclude that there is a variation in the impact of financial variables on growth of the firm at high and low levels of information asymmetry especially regarding investment and financing decisions. A similar picture emerges in the cases of firm size and industry effects. In addition, corporate dividen d policy has a similar effect on firm growth across all asymmetric levels. These findings prove that information asymmetry plays a vital role in the relationship between corporate financial decisions and growth of the firm. Finally, the results contribute to the vast literature on the estimation of information asymmetry by demonstrating that the classical and standard proxies for information asymmetry are not consistent in terms of the ability to differentiate between favorable or adverse selection (which corresponds to low and high level of information asymmetry).

Originality/Value: This chapter contributes to the related literature in two ways. First, this chapter offers updated empirical evidence on the way that financing, investment, and dividends decisions are made under conditions of favorable and adverse selection. Other related studies deal with each decision separately. Second, the study offers new proxies for measuring information asymmetry in order to reach robust estimates of the effects of financial decisions on growth of the firm under conditions of agency problems.

The purpose of this paper is to analyze the influence of firm-, industry- and country-level determinants on real annual sales growth in the context of a cross-classified multilevel perspective.

The authors studied 11,381 firms from 17 industries in six Latin American countries based on the data collected up to 2015. Since the data are nested in two levels (level 1: firms; level 2: cross-classification of industries and countries), the authors use a cross-classified multilevel model. The significant variability in all levels of analysis confirms the option for the multilevel model.

Differences in industries account for the largest proportion of variance (77.2 percent). This finding indicates that industry-level characteristics should be explored in the sales growth literature (it seems to the authors that they were neglected). This finding also calls attention to the roles of policy-makers in facilitating firm growth. The final model indicates that the considered variables explain approximately 55 percent of the differences in real annual sales growth in the same industry and country after having accounted for the impacts of the differences in firms. After accounting for the impacts of the differences in firms’ and countries’ characteristics, 43 percent of the variation in average real annual sales growth is due to differences in industries. The obtained results indicate that while firms from countries with higher GDP growth and more effective corporate boards present higher real annual sales growth, firms that operate in commodity producer industries have worse performance in this indicator. With respect to firm’s characteristics, larger firms (contradicting Gibrat’s law) and exporters grew less. Some results could be explained by the decrease in commodities’ prices and global purchases between 2012 and 2015.

The paper fills some gaps in the firm growth literature by testing Gibrat’s law in non-developed countries (not yet done, to the best of the authors’ knowledge) and exploring variables other than size in the explanation of firm growth (rarely used, to the best of the authors’ knowledge). Moreover, the adopted model correctly estimated the origin of the variability in firm growth in its natural cross-classified distinct levels.

The paper examines the differential effect of liquidity constraints on corporate growth using unbalanced panel data for 457 Pakistani firms over the period 2010–2017.

The study uses the probability of a financial unconstrained index constructed by estimating the endogenous regression model. This approach provides a time-varying measure of financial position for all firm-year observations and takes into account the different degrees of liquidity constraints that a company faces in attaining funds from external markets. It is derived from a multivariate selection equation that simultaneously accounts for all-important features of the underlying company identified in the literature. The cash flow variable has then interacted with various groups of dummy variables for financial constraint, which allows the coefficient of cash flow to vary across firm-year observations in the different liquidity constraint categories. The two-step system-GMM estimator is applied to estimate the main empirical model.

The results of the study provide evidence of the heterogeneity in firms' growth sensitivity to internal funds, depending on the degree of liquidity constraints. Financing growth through internal funds is found to be essential for both liquidity unconstrained and constrained corporates. However, it is observed that the coefficient of cash flow is greater for firms that do not have access to external financing and it eventually decreases with reductions in the magnitude of liquidity constraints, making the least constrained corporates' growth less responsive to internal funds. The results further indicate that smaller and younger firms show higher responsiveness of growth to internal funds. This finding is mainly attributed to financial market imperfections that make external funding difficult for them.

The results suggest that financially constrained firms should expand their corporate size more than the magnitude of positive income shocks they encounter. The study also suggests important policy implications for liquidity-constrained firms to carefully concentrate on their financing strategies to enhance their growth. By improving the corporate's capacity for production, corporates can achieve a faster effect of a potential positive income shock on their growth.

This paper contributes to the literature by constructing a financial constraint index by running the endogenous regression model. It also contributes by investigating the differential impact of credit constraints on firms' growth in Pakistan and how corporate size and age affect firm growth when financial constraints and investment opportunities are controlled.

High-growth firms (HGFs) make a considerable contribution to economic growth, and in recent years they have received increasing interest from entrepreneurship scholars. By analysing recent findings in the literature of high-growth firms, this study identifies some Stylized Facts, as well as contradictory findings, and also some unknowns regarding the determinants and internal strategies of HGFs, particularly on the persistence of their superior growth performance and the implications of recent findings for economic policy.

This paper seeks to examine the impact of firms' technological capability and other firm and environmental characteristics on the growth of small and medium‐sized enterprises (SMEs) in six transition countries at different stages of transition. It compares three advanced Central Eastern European countries (Poland, Hungary, and Czech Republic) with three laggard countries in South Eastern Europe (Albania, Macedonia, and Serbia and Montenegro).

A theoretical framework is proposed based on three groups of factors influencing SME growth: innovative and entrepreneurial features of the firm, characteristics of the firm, and those related to the institutional/business environment. Subsequently this paper uses the Business Environment and Enterprise Performance Survey (BEEPS) conducted by the World Bank/EBRD in 2002 and 2005 to test a number of hypotheses regarding the determinants of SME growth.

The two groups of countries have similarities and differences: both display similar trends with respect to the growth process; both are affected by entrepreneurship activities positively; but the institutional barriers affecting the two groups are somewhat different. It was also found that, despite the growing importance of SMEs in all transition economies, they still face many institutional barriers – which have prevented them from making a greater contribution.

The key limitations of the empirical investigation are the qualitative nature of survey data and the shortcomings associated with self‐declaration of entrepreneurs. It is important for future research to complement this line of research with panel data.

This cross‐country study extends current understanding of the determinants of SME growth in various stages of transition economies based on a unique data set. It also provides some implications for policymakers as well as entrepreneurs/managers for improving the growth of SMEs.