The Relationship Between Firm Size and Firm Growth in the U.S. Manufacturing Sector

Bronwyn H. Hall

NBER Working Paper No. 1965 (Also Reprint No. r1020)
Issued in June 1986
NBER Program(s):Productivity, Innovation, and Entrepreneurship

This paper investigates the dynamics of firm growth in the U. S.

manufacturing sector in the recent past. I use panel data on the

publicly traded firms in the U. S. manufacturing sector: from a

universe of approximately 1800 firms in 1976, I am able to follow most

of them for at least three years, and over half of them from 1972 until

1983. I consider several problems, both econometric and substantive,

which exist in analyzing this kind of data: the choice of size measure,

the role of measurement error, and the effect of selection (attrition)

on estimates obtained from this sample.

Using time series methods, suitably modified for panel data (where

the number of time periods per observational unit is small), I analyze

the behavior of employment over time and find that most of the change in

employment in any given year is permanent in the sense that there is no

tendency to return to the previous level. Year-to-year growth rates are

largely uncorrelated and there is almost no role for measurement error.

I find that Gibrat's Law is weakly rejected for the smaller firms in my

sample and accepted for the larger firms; Other measures of size

produce essentially the same results.

Correction for attrition from the sample changes the results

somewhat: I use a simple model in which firms leave the sample because

they are small and/or undervalued (since many exits are acquisitions)

and find that Tobin's Q, the raio of market valuation to the value of

the underlying assets of the firm, is a much better predictor of exit

probability than size alone (firms with low Q are more likely to exit

the sample). When I use this estimate of the probability of exit to

control for selection bias, Gibrat's Law is weakly rejected for firms of

all sizes and there are significant positive effects on firm growth from

both investment in physical capital and R&D expenditures, with R&D

having a somewhat higher net effect.

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Document Object Identifier (DOI): 10.3386/w1965

Published: Hall, Bronwyn H. "The Relationship Between Firm Size and Firm Growth in the U. S. Manufacturing Sector," Journal of Industrial Economics, Vol. XXXV, No.4, June 1987, pp. 583-606. citation courtesy of

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