Gibrat's Law and diversification

Giulio Bottazzi and Angelo Secchi

Industrial and Corporate Change, 2006, vol. 15, issue 5, 847-875

Abstract: This article presents an analysis of the growth patterns of the worldwide top 200 firms in the pharmaceutical industry. A test of the Gibrat's Law of Proportionate Effect is performed and we find, in line with previous literature, a violation concerning the variance of growth. Using disaggregated data on sub-markets, we are however able to show that this violation can be completely accounted for by a diversification effect, namely a scale relation between the number of sub-markets in which a firm is active and its size. To interpret these findings, we propose a stochastic branching model of firm diversification consistent with a notion of cumulative corporate competences. Copyright 2006, Oxford University Press.

Date: 2006
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