Testing the validity of Gibrat’s law in the context of profitability performance

Roman Fiala and Veronika Hedija

Economic Research-Ekonomska Istraživanja, 2019, vol. 32, issue 1, 2850-2863

Abstract: The purpose of the article is to investigate whether the profitability of firms affects the validity of Gibrat’s law. We begin with the thesis that small firms have less access to outside financial sources (especially bank loans) than large companies, so the role of profit in generating growth varies depending on firm size and is probably more important for smaller companies. We divided a large sample of companies (about 30,000 firms) into three profitability groups (lower 25%, middle 50%, and upper 25% of firms) to examine whether the size-growth relationship is influenced by profitability. Gibrat’s law was verified both at the aggregate level and at the industry level (using one-digit NACE classification). The results show that the validity of Gibrat’s law is not significantly influenced by the amount of firm profit at the aggregate level or at the industry level. In most sectors and profitability groups, smaller firms grow faster than their larger counterparts do.

Date: 2019
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DOI: 10.1080/1331677X.2019.1655656

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