Scandinavian Working Papers in Economics
Ratio Working Papers,
The Ratio Institute
No 204: Growth Paths and Survival Chances: An Application of Gambler's Ruin Theory
Alex Coad (), Julian Frankish, Richard Roberts and David Storey
Additional contact information
Alex Coad: Ratio, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Julian Frankish: Ratio, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Richard Roberts: Ratio, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
David Storey: Ratio, Postal: The Ratio Institute, P.O. Box 5095, SE-102 42 Stockholm, Sweden
Abstract: This paper links new firm survival with growth, with a focus on the patterns in firms' growth paths. We theorise a Gambler's Ruin framework by arguing that new rm performance is best modelled as a random walk process, but that survival is nonrandom and depends primarily on the stock of accumulated resources. A firm's resources are either there when the business begins or are generated by successful periods `wins'. The empirical section tracks, over six years, the sales and survival/non-survival of 6,247 UK start-ups which all began trading in the same quarter of 2004. We do not find strong evidence in favour of a taxonomy of growth paths, because we observe that every possible growth path seems to occur with roughly equal probability. However, we observe that growth paths influence subsequent survival. Controlling for lagged size, we observe that longer lags of growth, and even start-up size, have signicant eects on survival.
Keywords: Growth paths; firm growth; firm survival; gambler’s ruin; start-up size
JEL-codes: L25
42 pages, December 4, 2014
Full text files
wp_204.pdf
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