Testing the validity of Gibrat’s law for Slovenian farms: cross-sectional dependence and unit root tests

Abstract

This paper studies the validity of Gibrat's law for the growth of Slovenian farms between 2007 and 2015 using Farm Accountancy Data Network datasets. Cross-sectional dependence test and four different groups of panel unit root tests are applied to study the relationship between farm size and the farm size growth. It revealed evidence of cross-sectional dependence in farm sizes. Both input (land and labour) and output (economic) sizes of variables as proxy for the measures of farm size are applied. The results suggest that Gibrat's law is valid for Slovenian farms independently from the measures of farm size and types of panel unit root tests. Slovenian smaller farms are not growing faster than larger ones and thus all farm sizes tend to contribute to an increase in average farm size in generally relatively small-to medium-size farm structures.

Does Human Capital Play an Important Role in Farm Size Growth? The Case of Slovenia

“…Our analysis focuses specifically on a sample of Slovenian FADN farms. Slovenia can be classified as one of a number of EU-28 member states that have on average smaller but growing average farm size (Bojnec and Fertő, 2020a;2020b). Similarly to some other countries, farm exit occurs particularly among farms of medium size in Slovenia (Bojnec and Latruffe, 2013).…”

“…Similarly, the validity of Gibrat's Law can be rejected for French and Slovenian dairy farms, but not for Slovenian crops farms, because the rate of growth of crop farms in terms of land is independent of their size. Bojnec and Fertő (2020a) investigated the validity of Gibrat's Law for the growth of a sample of Slovenian farms in the period 2007-2015 using a cross-sectional dependence test and four different groups of panel unit root tests. The results confirmed the validity of Gibrat's Law independent of measures of farm size (inputs in the form of land and labour per farm, and outputs as economic size per farm) and type of panel unit root test.…”

Financial constraints and nonlinearity of farm size growth

“…Testing Gibrat's law has a long tradition, with mixed empirical results depending on the country, branch of farming/industry/sector, time/length of analysis, data and methodological approach, as well as the selection of control variables or other drivers of firm/farm growth (Bakucs et al , 2013; Akimowicz et al , 2013; Bojnec and Fertő, 2020, 2021a, b; Bojnec et al , 2022). If Gibrat's law holds, stochastic models of firm/farm growth should prevail and assuming a proportionate effect, exogenous random changes will drive firm/farm growth (Geroski, 2005; Ward and McKillop, 2005).…”

“…There is a wealth of literature about the validity of Gibrat's (1931) law of proportional firm size growth – the proposition that the growth rate of firms/farms is independent of their initial size at the beginning of a period of examination. Empirical tests of this relationship have produced mixed results for different types of firms in the manufacturing and service sectors (Donati, 2016) and different typologies of farms in agriculture (Bojnec and Fertő, 2020, 2021b; Bojnec et al , 2022). Farm size growth dynamics might lead to a change in farming structure if Gibrat's law does not hold, either due to the catching up of smaller farms that grow faster than larger farms, or because of greater farm size concentration (when larger farms grow faster than smaller ones).…”

“…The literature on the relationship between financial constraints and investment is presently increasing (Fertő et al , 2020, 2021). The gap in the literature is in another strand of research that focuses on the growth of farms (Akimowicz et al , 2013; Bojnec and Fertő, 2020, 2021a, b). The in-depth analysis regarding understanding of the role of liquidity constraints, farm debts and nonlinearity in farm growth dynamics is basically non-existent.…”