How Firms Respond to Business Cycles: The Role of Firm Age and Firm Size

Abstract

There remains considerable debate in the theoretical and empirical literature about the differences in the cyclical dynamics of firms by firm size. This paper contributes to the debate in two ways. First, the key distinction between firm size and firm age is introduced. The evidence presented in this paper shows that young businesses (that are typically small) exhibit very different cyclical dynamics than small/older businesses. The second contribution is to present evidence and explore explanations for the finding that young/small businesses were hit especially hard in the Great Recession. The collapse in housing prices accounts for a significant part of the large decline of young/small businesses in the Great Recession. [JEL E32, E24, D22, L26] IMF Economic Review (2013) 61, 520-559.

Immigrants Equilibrate Local Labor Markets: Evidence from the Great Recession

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“…The empirical evidence suggests that the relationship between firm size and the likelihood of survival is shaped by technology and the stage of the industry life cycle (Agarwal & Audretsch, 2001). Fort et al (2013) state evidence that young businesses (that are typically small) display very different cyclical dynamics than small/older businesses. Young/small businesses are more sensitive to the cycle than older/larger businesses.…”

The Role of the Debt‐Service Ratio as a Leading Indicator of Households Consumption

“…Strong research efforts have examined the above arguments on the role of imperfections in the link between internal cash flows and investment flows (Kaplan and Zingales, ), for small firms, especially during times of financial stress (Campello et al, ; Fort et al, ), in the link between internal cash flows and asset prices (Gan, ; Chaney et al, ), credit constraints for firms and households (Gertler and Gilchrist, ), the inability of household to borrow (Jappelli and Pistaferri, for a review), house prices and households’ borrowing (Almeida et al, ; Claessens and Kose, ), housing prices and local credit and growth developments (Mian and Sufi, ; Benmelech et al, ), the ability of sovereign nations to borrow from international markets (Obstfeld and Rogoff, ; Ferraris and Minetti, ; Korinek and Mendoza, ), the impact on countries’ exchange rates (Aghion et al, ; Cook, ), the transmission process of business cycles (Guerrieri et al, ), and finally, in explaining the synchronized nature of the 2008 financial crisis (Kalemli‐Ozcan et al, ; Quadrini, ). The likelihood that higher levels of household debt could induce deeper or longer recessions has important implications for the overall course of the business cycle, as well as for its components, such as consumption.…”