Old firms and the relationship between age and size

If old firms are, on average, much larger than young firms, does this mean that firms get better with age? Using Danish administrative data on firms aged 0–65, we study the relationship between size and age. In the cross‐section, average size is increasing with age. However, by exploiting the panel structure through the estimation of fixed effects or by using a partial identification approach to the so‐called age–period–cohort problem, we find evidence that firm size increases with age only for the first 10–15 years, and falls after that. Moreover, sample composition effects seem to be important to understand the patterns in the cross‐section: we find significant differences in exit rates by firm size and strong cohort effects for firms entering in the late 1950s. We also find that the exit rate is not monotonically decreasing with age; for smaller firms, it starts increasing again in their 20s, spiking in their late 30s.