The growth gap is widening between
large and small companies. A new study
offers a surprising explanation.
BY EDMUND L. ANDREWS
That change, Begenau and her colleagues
contend, is one of the few solid ways to
explain what they show is a widening gap in
the growth rates of big and small companies.
From 1980 to 1985, for example, big
companies on average grew by 39.5%, while
smaller companies grew by 7.3%. That was
a surprisingly wide gap, but it became even
wider from 2000 to 2005, when the average
big company expanded by almost 60% and
average small company grew at the same
rate as before.
The researchers found the same
widening gap when they compared growth
rates before 1980 and those between 1980
Given all the bromides about small business
being the engine of job creation, it may
sound jarring to hear that the big growth is
increasingly coming from big companies.
Over the past 30 years, however, the
broad trend in the United States has been
that big companies are growing faster and
becoming more dominant. Between 1980
and 2015, the overall share of jobs at firms
with more than 1,000 employees increased
from about one-quarter to one-third, while
the share at companies with fewer than
100 workers declined modestly.
Meanwhile, some of the biggest
companies have become gargantuan: Apple
and Amazon both just crossed the $1 trillion
mark in market value. That is more than the
GDP of all but 16 nations.
Juliane Begenau, an assistant professor
of finance at Stanford GSB, has a startling
theory about a key reason for this shift:
In a paper coauthored with Maryam
Farboodi at MI T Sloan and Laura Veldkamp
at Columbia University, Begenau argues
that the quantum leaps in both data and
computing power have given big
companies a consistent edge in raising
capital more cheaply.
It’s a bold claim, but the basic idea is
simple: Bigger companies produce more
data for investors, which they can now
analyze at ever lower cost. That reduces the
uncertainty around bigger firms, which in
turn lowers their cost of capital.
“A key pillar in a firm’s decision to raise
capital and to grow is how cheap it is to raise
funds,” Begenau says. “Computer speeds
have increased dramatically over the past
30 years, and investment firms and hedge
funds are processing a lot of data in order to
reduce their uncertainty. If a firm provides
more data, which investors can use to
reduce the uncertainty about its prospects,
that’s going to reduce its financing costs.”
It’s long been true that big companies
generally have lower capital costs, in
part because they have longer track records.
What’s changed is the amount of data
available and the cost of analyzing it.