How Firms Respond to Business Cycles: the Role of Firm Age and Firm Size
77 Pages Posted: 20 Jun 2013 Last revised: 8 Oct 2014
Date Written: June 2013
There remains considerable debate in both the theoretical and empirical literature about the differences in the cyclical dynamics of firms by firm size. Some have hypothesized that small firms are more sensitive to cycles while others have posited that larger firms are more sensitive. Researchers have found evidence supportive of both hypotheses -using different cyclical indicators and focusing on different underlying shocks. This paper contributes to the debate in two ways. First, the key distinction between firm size and firm age is introduced. The evidence presented in this paper shows that young businesses (that are typically small) exhibit very different cyclical dynamics than small/older businesses. Young/small businesses are more sensitive to the cycle than older/larger businesses. Evidence about the difference in the cyclical dynamics between small/older and large/older businesses is mixed. The second contribution is to present evidence and explore explanations for the finding that young/small businesses were hit especially hard in the Great Recession. The collapse in housing prices accounts for a significant part of the large decline of young/small businesses in the Great Recession. The decline was especially pronounced in states with a large decline in housing prices. This pattern holds even after controlling, through a panel VAR, for national and local business cycle conditions.
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