Sunk Costs, Firm Size and Firm Growth

• Autor(a) principal: Cabral, Luís M. B.
• Data de Publicação: 1994
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10362/87353

For several decades, there has been a conventional wisdom that expected firm growth rates are independent of firm size, a property known as Gibrat's Law. However, recent empirical work by Evans (1987a,b), Hall (1987), and Dunne, Roberts and Samuelson (1989) has found a negative relation between firm growth and firm size. This paper provides a theoretical explanation for this negative relation in a model of new firm growth. The idea is that capacity and technology choices involve some degree of sunkness (that is, investments which value is foregone upon exit). Since small entrants are more likely to exit than large entrants, it is optimal for small entrants to invest more gradually, and thus experience higher expected growth rates, than large entrants. Additional empirical implications of the theory of sunk costs are also developed. These relate to profit rates, Tobin's Q, exit rates, degree of sunkness of capacity costs, as well as size and growth rates.