Sources of Firm Life-Cycle Dyanmics: Differentiating Size vs. Age Effects

What determines firm growth over the life-cycle? Exploiting unique firm panel data on internal organization, balance sheets and innovation, representative of the entire Canadian economy, we study recent theories that generate life-cycle patterns for firm growth. These theories include management practices and organizational capital accumulation, financial frictions, learning about demand, and recent endogenous growth models with incumbent innovation. We highlight the importance of differentiating between pure age effects of those theories and effects on size conditional on age. Our stylized facts highlight both, empirical successes and shortcomings of current theory, and the importance of differentiating between age and size effects. First, models of organizational capital and innovation are broadly consistent with firm size correlations conditional on age but have difficulties matching the life-cycle dynamics of firm organization and innovation. Second, among theories we analyze, management practices and organizational capital are the single most important set of determinants to explain intensive margin firm growth over the life-cycle. Third, although less important to explain intensive margin firm growth, financial frictions are an important determinant of firm exit, conditional on firm age.