Are Differences in Firm Size Transitory or Permanent?

CEPR Discussion Paper No. 1691

Cass Business School Research Paper

Posted: 18 Nov 1997

See all articles by Paul A. Geroski

Paul A. Geroski

London Business School; Centre for Economic Policy Research (CEPR)

Giovanni Urga

Centre for Econometric Analysis, Faculty of Finance, Bayes Business School (formerly Cass), London, UK

Chris F. Walters

London Business School

Date Written: October 1997

Abstract

Cross-section or short-panel econometric techniques typically used to examine Gibrat's Law of Proportionate Effect suggest that some degree of mean reversion exists, but may exaggerate the apparent randomness of corporate growth. We argue that a more natural way to explore the long-run distribution of firm sizes is to examine data on the growth of particular firms over long periods of time. Using a sample of 77 UK firms' real total net assets data observed continually for more than 30 years, our conclusions are that growth rates are highly variable over time, but differences in growth rates between firms do not persist for very long. Further, firms show no tendency to converge to either a common size or to a pattern of stable size differences over time. These results are compared and contrasted with standard approaches using the same data, which suggest firms reach and maintain stable positions in a skewed size distribution.

JEL Classification: C22, C23, L11

Suggested Citation

Geroski, Paul A. and Urga, Giovanni and Walters, Chris F., Are Differences in Firm Size Transitory or Permanent? (October 1997). CEPR Discussion Paper No. 1691, Cass Business School Research Paper, Available at SSRN: https://ssrn.com/abstract=11104

Paul A. Geroski (Contact Author)

London Business School ( email )

Sussex Place
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London, London NW1 4SA
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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Giovanni Urga

Centre for Econometric Analysis, Faculty of Finance, Bayes Business School (formerly Cass), London, UK ( email )

108 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 20 7040 8698 (Phone)
+44 20 7040 8881 (Fax)

HOME PAGE: http://www.bayes.city.ac.uk/faculties-and-research/experts/giovanni-urga

Chris F. Walters

London Business School ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

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