HUI Working Papers,
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Abstract: Gibrat’s law predicts that firm growth is purely random and should be independent of firm size. We use a random effects–random coefficient model to test whether Gibrat’s law holds at the firm level in the Swedish energy market. No study has investigated whether Gibrat’s law holds for individual firms in the energy sector. The present results support the claim that Gibrat’s law is more likely to be rejected ex ante when an entire firm population is considered, but more likely to be confirmed ex post after market selection has “cleaned” the original population of firms or when the analysis treats more disaggregated data. From a theoretical viewpoint, the results are consistent with models based on passive and active learning, indicating a steady state in the firm expansion process and that, before it is achieved, Gibrat’s law is violated in the short term, but holds in the long term when firms have reached a “steady state”. These results indicate that approximately 70% of firms in the Swedish energy sector are in steady state, with only random fluctuations in size around that level over the 15 studied years.

Keywords: firm size; firm growth; random coefficient; energy sector

JEL-codes: D22; L11; L25; L26

23 pages, January 29, 2014

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