Revisiting Gibrat's law using panel SURADF tests

Abstract

In this study, the newly-developed Panel SURADF tests advanced by Breuer et al. (2001) are used to investigate whether the growth rate of electronics firms is independent of their size, as postulated by Gibrat's (1931) Law of Proportionate Effects. Time-series data for the total assets of 48 electronic firms in Taiwan during the 1995-2004 period are used. Whereas other panel-based unit root tests are joint tests of a unit root for all members of a panel and are incapable of determining the mix of I(0) and I(1) series in a panel setting, the Panel SURADF tests investigate a separate unit root null hypothesis for each individual panel member and are, therefore, able to identify how many and which series in the panel are stationary processes. The empirical results from several panel-based unit root tests indicate that the total assets of all firms studied here are nonstationary, implying that Gibrat's Law holds for all 48 firms; however, Breuer et al.'s (2001) Panel SURADF tests unequivocally indicate that Gibrat's Law is only valid for 27 of those firms

Inter-relationship between firm growth and profitability

“…Most empirical studies of LPE used cross-sectional regression models through a simple autoregressive model (for example, AR(1)), but the models were criticized due to their arbitrariness in choosing lag terms. Recently, a few studies (Chen and Lu, 2003;Goddard et al, 2006;Chu et al, 2008) tested the LPE using panel unit-root models because LPE assumes non-stationarity in the time series analysis. The benefit of the panel unit-root test on LPE lies in its ability to test a long series effect in non-stationarity, while the weakness of the test is its inability to include control variables that may affect firm growth (i.e., prior profitability, leverage, and market competition).…”

Managerial Performance Differences between Labor-Owned and Participatory Capitalist Firms

“…A clear finding of all of these studies is the inability to conclusively support or reject Gibrat's hypothesis that the firm's growth rate is independent neither of its current size nor of its past history. It should also be pointed out that inconclusive results appear in the literature regardless of the type of data utilized, be they cross sectional, time series, or panel in nature (e.g., Chu, Sher, and Yeh ).…”