Working Paper: CEPR ID: DP1431
Authors: Paul A. Geroski; Stephen J. Machin; Chris F. Walters
Abstract: This paper argues that current-period corporate growth rates reflect changes in current expectations about the long-run profitability of a firm. Using data on a balanced panel of 271 large, quoted UK firms over the period 1976?82, we report the existence of a positive, statistically significant and robust correlation between current-period growth rates and a natural measure of changes in current expectations about long-run profitability, namely changes in the stock market valuation of the firm.
Keywords: corporate growth; Gibrat's law; panel data
JEL Codes: L1; L2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current-period corporate growth rates (D25) | changes in market value (G19) |
| changes in market value (G19) | expectations about future profitability (D84) |
| current-period corporate growth rates (D25) | expectations about future profitability (D84) |
| macroeconomic conditions (E66) | corporate growth rates (D25) |
| expectations about future profitability (D84) | corporate growth rates (D25) |