Robert J. Petrunia

Age Effects, Leverage and Firm Growth

Recent theories of firm dynamics emphasize the role of financial variables as determinants of firm growth. Empirically examining these relationships has been difficult, since there is a lack of financial data on the small, young, and private firms. Using a unique administrative data set, this paper considers the growth of new firms in Canadian manufacturing from a financial perspective. We find that financial factors, such as leverage and initial financial size, impact growth rates for new firms. Further, the inclusion of leverage has little impact on the economic significance of the conditional age and size relationships with firm growth.

The Impact of Initial Financial State on Firm Duration Across Entry Cohorts

Recent theories of industry dynamics emphasize the role of financial frictions in determining post entry performance of firms. Testing these theories has been difficult because of the lack of financial data on small, young and private firms. Using a unique data set, T2LEAP, this paper considers the survival of new firms in Canadian manufacturing from a financial perspective. Duration analysis quantifies the effects of firm, industry and aggregate factors. Findings show that nonlinear effects are found with firm leverage. Finally, likelihood decompositions offer insights into the contributing factors to firm hazard for nine entry cohorts during the period 1985–1997.

Does Gibrat's Law Hold? Evidence from Canadian Retail and Manufacturing Firms

This paper investigates the validity of Gibrat’s Law holding for firms in manufacturing and retail trade sectors. The object is to expand our knowledge of Gibrat’s Law to include non-manufacturing firms. A unique longitudinal firm-level database, which contains information on Canadian incorporated establishments, enables the inter-industry comparison. The findings of the analysis are that Gibrat’s Law is violated in both manufacturing and retail sectors. Violations of Gibrat’s Law for both sectors include (i) growth rates that depend on firm size (ii) growth variability that depends on firm size and (iii) a negative persistence of firm growth. Finally, age effects or selection effects are not the causes of these violations.

Functional Principal Component Analysis of Density Families with Categorical and Continuous Data on Canadian Entrant Manufacturing Firms

This article investigates the evolution of firm distributions for entrant manufacturing firms in Canada using functional principal components analysis. This methodology describes the dynamics of firms by examining production variables, size, and labor productivity, and a financial variable, leverage (debt-to-asset ratio). We adapt the canonical functional principal components analysis to allow for the inclusion of qualitative information in the form of discrete variables, industry, and region, to capture market structure differences, which is shown to change the dynamics of firm size and labor productivity distributions only. We also perform various tests with the null hypothesis that the distributions are equal across time. When accounting for industry and regional categories, there is a substantial fall in the number of rejections of the null hypothesis of equality for size and labor productivity, which is not the case for leverage. These results show the importance of including qualitative information to account for potential heterogeneity when applying functional principal component analysis to firm-level data. Finally, the methodology finds a correlation between the evolution of variable distributions and macroeconomic factors. This article has supplementary material online.

Post-Entry Struggle for Life and Pre-Exit Shadow of Death from a Financial Perspective

The success or failure of small, young, and private firms depends highly on the evolution of their financial position. This paper considers the post-entry/pre-exit adjustment process of firms with focus on financial dynamics (debt-to-asset ratio). Empirically examining financial relationships has been difficult, due to a lack of data on the small, young, and private firms. With age, the post-entry struggle for life sees entrants become relatively larger and reduce their leverage, while their average growth rates fall. Further, entrants begin life more productive than the typical firm within an industry, but this disparity quickly reverses. Pre-exit dynamics see firm growth and relative firm size fall, while relative leverage and labour productivity rise. Increasing leverage hints at a shadow of death. Selection and survivor effects contribute to post-entry dynamics, while turnover and transition effects contribute to pre-exit dynamics.

Studying Firm Growth Distributions with a Large Administrative Employment Database

Abstract This paper uses business tax administrative data to describe the annual firm growth rate distribution in Canada over the 2000–2009 period. This administrative tax database provides a unique lense to study firm growth as it allows us to look at the universe of Canadian employer firms and investigate the firm growth distribution across different dimensions. A non-normal, fat-tailed shape for the firm growth distributions holds across years, industries, regions, as well as firm size and age classes. The results show that the distributions of employment growth rates in Canada have more density in both the center and tails than a normal distribution. The evidence paints a picture of firm growth dynamics whereby most firms change very little each year, while a nontrivial amount also markedly grow or decline. A final finding is that young firms, aged four or less, represent a special case with an upwardly skewed distribution and a median growth rate greater than zero.

Tail Risk in a Retail Payments System

Abstract In this paper, we study a credit risk (collateral) management scheme for the Canadian retail payment system designed to cover the exposure of a defaulting member. We estimate ex ante the size of a collateral pool large enough to cover exposure for a historical worst-case default scenario. The parameters of the distribution of the maxima are estimated using two main statistical approaches based on extreme value models: Block-Maxima for different window lengths (daily, weekly and monthly) and Peak-over-Threshold. Our statistical model implies that the largest daily net debit position across participants exceeds roughly

The Decline of Manufacturing in Canada: Resource Curse, Productivity Malaise or Natural Evolution?

1.5 billion once a year. Despite relying on extreme-value theory, the out of sample forecasts may still underestimate an actual exposure given the absence of observed data on defaults and financial stress in Canada. Our results are informative for optimal collateral management and system design of pre-funded retail-payment schemes.

Worker Separations and Industry Instability

The state of Canadian manufacturing is a constant issue in current economic and public policy debates. Over the past 50 years, there has been a decline in the contribution of manufacturing to the overall Canadian economy. This decline is especially true for the economies of two provinces, Ontario and Quebec, which traditionally were the most manufacturing intensive. Ontario, in particular, is hit hard by the 2008 recession in terms of both employment and output share decline of its manufacturing sector. This paper explores the relative importance of three explanations for the decline of the Canadian manufacturing sector. Natural evolution offers the first explanation as the economies of most Western countries move away from manufacturing and toward the services. A second explanation for this decline is Dutch Disease. The period from 2003 to 2014 sees both a significant rise in commodity prices and the Canadian dollar. This period also saw a booming resource sector – in particular, the energy / commodity producing provinces of Alberta, Saskatchewan and Newfoundland and Labrador. Finally, Canada’s manufacturing productivity performance has been weak relative to other countries, which may also be a factor in its manufacturing decline. Our results show that most of the Canadian manufacturing sector decline occurs in Ontario and Quebec, while manufacturing’s contribution remains flat or slightly increases in most of the other provinces.

Duration of new firms: The role of startup financial conditions, industry and aggregate factors

This paper looks at the impact industry instability has on worker separations. Workers leave firms one of two ways: (i) voluntarily by quitting; or (ii) involuntarily through firm layoffs. Using data drawn from the Longitudinal Worker File, a Canadian firm-worker matched employment database, we are able distinguish between voluntary and involuntary separations using information on reasons for separations and assess the impact industry shutdown rates have on worker separation rates, both voluntarily and involuntarily. Once controlling for various factors and potential selection bias, we find that industry shutdown rates have a positive and significant effect on the overall separation, layoff and quit rates of workers. Finally, industry instability has a much larger impact on layoff rates when comparing voluntary and involuntary separations.