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20-07-2019

Measuring the persistence of high firm growth: choices and consequences

Author: Eva Christine Erhardt

Published in: Small Business Economics | Issue 1/2021

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Abstract

Does high growth persist? This study shows how the answer to this question depends on the measurement of growth. It systematically compares the consequences of different choices (absolute, relative, and composite growth formulas) on three notions of persistence: repetition of high growth, future growth of surviving high-growth firms, and overall future growth of both survivors and exits. The empirical analysis is based on administrative data from Amadeus on Bulgarian firms for 3-year periods of growth between 2001 and 2010. The focus is on total growth in employees. Our findings demonstrate how results largely vary between growth measures. Moreover, we detect empirical regularity related to growth measures in previous evidence. Most importantly, if persistence is understood as overall future growth including both the contributions by surviving and exiting firms, then high growth does not persist.

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Employment data was imputed for up to two missing values. Serial correlation for employment was above 0.8.

We considered lower cutoff points. As the number of exits by large firms with 250–1,000 employees before exit only amounts to 51 out of 44,514 observations used in regression analyses of exits in t + 3, we considered a cut-off point > 1000 as appropriate.

A re-estimation of regression results for growth of surviving firms confirms similarity between percentage changes and log differences.

Re-estimations of results for a sample including firms with growth > 1000 employees over 3 years or exits with > 1000 employees showed that main findings remain unchanged.

Similar to Daunfeldt and Halvarsson (2015), the required minimum absolute growth quickly fell off beyond the 1% cutoff point (5 employees for 5%, 2 employees for 10%).

Even though our approach measures age with error, it is considered advantageous to simply proxying age with size as for example in Winker (1999).

Firm size categories and industry code presented at more aggregate level than used for regressions.

Measured as increase in employees over 3 years by surviving firms with positive growth and an initial size of 10+ employees as in Bravo-Biosca et al. (2016).

One-part models would pool over surviving and exiting firms and therefore restrict the parameters of all variables to have an equal impact on both types of firms. Given that size, for example, should be negatively related with growth, but positively related with survival, a two-part model seems advantageous.

Alternatively, a re-estimation of Eq. (1) with quantile regressions shows that the choice of growth formulas continues to influence findings across the growth distribution. The quantile regression method is not suited for estimating any of our other equations.

Using non-HGFs as benchmark is a very common approach in the literature when samples do not include all firms in an economy (Henrekson and Johansson 2010, p. 229).

Transition probabilities of exiting non-high-growth firms or those with negative and zero growth are identical irrespective of how HGF_it is defined. Probabilities for non-high-growth firms with positive growth (constituting the residual of high-growth) differ depending on the definition of HGF_it.

As shown in Table 16, control variables are significantly associated with future growth of surviving firms in all specifications. Initial size is positively and age is negatively associated with growth.

It can be easily calculated from columns (6) and (9) that exit rates of high-growth firms would need to be as low as 0.08 instead of 0.23 to result in positive overall growth in column (5). This means that acquisitions, which are potentially misclassified as exit, would need to contribute to two thirds of estimated exit rates to alter the direction of main results.

For firms newly appearing in the last year of each period, e.g., 2004, growth rates cannot be calculated.

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Title: Measuring the persistence of high firm growth: choices and consequences
Author: Eva Christine Erhardt
Publication date: 20-07-2019
Publisher: Springer US
Published in: Small Business Economics / Issue 1/2021
Print ISSN: 0921-898X
Electronic ISSN: 1573-0913
DOI: https://doi.org/10.1007/s11187-019-00229-7

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