Abstract
In the race to the South Pole, Roald Amundsen’s expedition covered an equal distance each day, irrespective of weather conditions, while Scott’s pace was erratic. Amundsen won the race and returned without loss of life, while Scott and his men died. In the context of firm growth, the Amundsen hypothesis suggests that smoother growth paths are associated with better performance in subsequent periods. We develop a new method to investigate how firms’ sales growth deviates from their long-run average growth path. Our baseline results suggest that growth path volatility is associated with higher growth of sales and profits, but also with higher exit rates. However, this result is driven by firms with negative growth rates. For positive-growth firms, volatility is negatively associated with both sales growth and survival, providing nuanced support for the Amundsen hypothesis.
Plain English Summary
In the race to the South Pole, Roald Amundsen and Robert Falcon Scott adopted different strategies that resulted in victory for Amundsen and death for Scott. Amundsen’s approach was to consistently pace his team (to cover a fixed and equal distance each day), while Scott sought to cover as much distance as possible each day. In the context of firm growth, this relates to the tradeoff between steady growth (low volatility in growth rates) and growing as fast as possible in each period (potentially leading to high volatility in growth rates). We develop a new set of indicators for quantifying firms’ growth paths, observing that growth path volatility in general is associated with higher growth of sales and profits, but also with higher death rates. This result is driven by firms with negative sales growth, however. Like Amundsen, it seems beneficial for firms with positive sales growth to pace themselves to increase their subsequent growth and likelihood of survival.
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Notes
Amundsen and Scott’s preparations and race to the South Pole is excellently covered in Roland Huntford’s novel The Last Place on Earth: Scott and Amundsen’s Race to the South Pole (Huntford, 1999).
While we concur that the Amundsen-Scott case is an interesting metaphor for starting discussions about firm growth paths, of course, we do not claim the metaphor is perfect.
It is also possible that more volatile growth paths are signs that the firm is governed by managers that are less able to plan ahead, i.e., that volatility rather is a consequence of bad planning.
As is often done in the empirical literature, we group together voluntary liquidations with bankruptcies, because they are both instances of firm death (Coad, 2014).
See, for example, Baù et al. (2019) for a recent concise discussion.
Considering that firm growth rates lack persistence and that the within-variation in firm growth rates is higher than the between-variation in growth rates (Geroski & Gugler, 2004), we follow previous literature on firm growth (e.g. Coad, 2010) and do not include time-invariant firm-specific fixed effects in our regressions.
For example, industry-specific fixed effects can alleviate possible issues of industry-specific degrees of volatility of annual growth rates. However, presumably the main type of industry-specific variations in demand occur at a seasonal frequency, not at the level of annual growth rates, and like the vast majority of firm growth research, we cannot control for within-the-year seasonal variations in demand. Another use of industry-specific fixed effects is to control for potential differences in the capital intensity of growth rates that may vary across industries.
A first reason for our present unconcern about multicollinearity is that we have a large number of observations (O’Brien, 2007). Furthermore, a correlation matrix (see table 6 in the appendix) allays fears about excessive pairwise correlations between variables. As an extra check, Online Appendix OSM-3 verifies the stability of the coefficients across specifications as variable blocks are introduced stepwise.
See, for example, the survey of R2 statistics obtained from growth rate regressions in Coad 2009, Table 7.1. Furthermore, we expect a low R2 in our estimations, given that our sample covers a large number of small firms (whose growth rates are more erratic than for small samples of large firms).
Note however that our estimates in Table 4 Column 3 suggest that higher initial size is positively associated with exit, which goes against many previous results. The usual interpretation of the size-exit relationship may not hold in Table 3 Column 3 because exit in (t:t + 3) is conditional upon surviving all of the growth path period (t-4:t), and this may select out small short-lived firms. In our data, the simple correlation between exit and once-lagged log size is indeed negative. Also, our regression results for this coefficient remain similar after a stepwise introduction of covariates. We therefore advise caution when interpreting the relationship between initial size and subsequent exit, and we do not suggest a naive interpretation that larger firms have higher exit rates.
The figures correspond to the relationship between growth path volatility (t-4:t) over different percentile groups of the Average growth rate variable and sales growth, profit growth, and firm exit over the subsequent period (t:t + 3).
Essentially, this allows the “effect” of Area to vary, depending on where in the distribution of Average growth rate a firm is located. We include interaction effect between Area and a set of dummy variables that corresponds to the percentile groups of the Average growth rate variable. The point estimates, i.e. the marginal effects, is therefore given by dy/dx = a + b(i) * p(i)*(Average growth rate) where “i” corresponds to the different percentile groups “5 < 10, …, > 95”. The estimate for “a” corresponds to the result for p(< 5), which is used as the reference group. The effects of subsequent groups such as p(5 < 10) is hence given by “a + b(5 < 10)”.
These results are omitted in order to save space, but are available from the authors upon request.
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Appendix 1 details on the sample and variables
Appendix 1 details on the sample and variables
We also test if our results are robust to commonly used growth dispersion measures, such as the absolute min–max growth difference (AMM). The AMM measure is calculated by first ranking a firm’s growth rates in order of size and then calculating the absolute difference between the firm’s largest growth rate and the smallest growth rate. More formally, if \(\left|{s}^{\mathrm{max}}\right|=\mathrm{max}{\left(\left|\mathrm{ln}\frac{S\left(t+1\right)}{S\left(t\right)}\right|\right)}_{t=0}^{T}\) and \(\left|{s}^{\mathrm{min}}\right|=\mathrm{min}{\left(\left|\mathrm{ln}\frac{S\left(t+1\right)}{S\left(t\right)}\right|\right)}_{t=0}^{T}\) corresponds to the largest and smallest absolute growth rates over the sequence of growth rates, the AMM measure can be defined as:
Finally, in order to compare our results with a traditional volatility measure, we have also done all estimations using the standard deviation (SD) as our growth dispersion measure.
All growth dispersion measures that are used in the paper are normalized to have mean zero, and a standard deviation of one. To calculate \(Area\) and \(AMM\), we use consecutive periods, each with \(T=4\). The outcome measures, we consider is the future growth rate of \(\mathrm{ln}\frac{S\left(T+k\right)}{S\left(T\right)}\) with \(k=\mathrm{1,2}\) and \(3\).
The correlation between our new indicator of growth dispersion and the more traditional ones are presented in Table 1
Our main results remain qualitatively similar when using the alternative growth dispersion measures. Note, however, that these alternative growth dispersion measures cannot be used to categorize firms into different growth types (see Table 5).
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Coad, A., Daunfeldt, SO. & Halvarsson, D. Amundsen versus Scott: are growth paths related to firm performance?. Small Bus Econ 59, 593–610 (2022). https://doi.org/10.1007/s11187-021-00552-y
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DOI: https://doi.org/10.1007/s11187-021-00552-y