Firm creation and post-entry dynamics of de novo entrants

Abstract

We show that within the same age cohort, growth rates of young firms are strongly increasing in firm size. This robust empirical pattern is confined to the initial years after entry; in line with previous studies, we find that growth rates become independent of size as a cohort matures. Both the initial pattern and the subsequent convergence are consistent with the framework of the passive learning model if young firms adjust their size only slowly to new information, for example due to financing or hiring frictions. Importantly, we focus our analysis on firms that enter de novo, i.e. newly registered firms that start new operations and hire their first employee. Using two state-of-the-art record linking methods, we distinguish them from pre-existing companies that merely re-register as a new firm, for example following an ID change or merger. The extremely narrow size distribution that we observe for de novo entrants provides further support for the passive learning model.