The large decline in economic activity triggered by the COVID-19 pandemic raised concerns about the potential risks to the corporate sector (Demmou et al. 2020). A key concern was that smaller or younger firms could bear the brunt of the severe recession, with the likelihood of lasting economic damage, not least via reduced business dynamism and weakened competition (Akcigit et al. 2021, Barnes et al. 2021).
In a recent paper (Franco et al. 2023), we investigate whether these concerns materialised by analysing the performance of more than 150,000 non-financial companies, listed and non-listed, operating in both manufacturing and services sectors across more than 50 countries, through the COVID-19 cycle until end 2021. Using a difference-in-differences approach, complemented by cross-sectional and first differences regressions, we compare the revenue and investment dynamics of larger and older firms to that of their smaller and younger counterparts operating in the same country and sector. We find no evidence of a size premium, which helps assuage concerns about the potential negative consequences of the pandemic for industry concentration and competition.
No evidence of a size premium
We find that, all else equal, larger and older firms have tended to perform similarly to or worse than their smaller peers in terms of revenues, both during 2020 and the subsequent recovery in 2021 (Figure 1). The baseline estimates use (the log of) pre-pandemic total assets as a proxy for firm size, but the analysis is robust to alternative definitions. For instance, the results are unchanged when comparing the revenue dynamics of pre-COVID-19 industry leaders (defined either as firms in the top quartile/decile of the sectoral distribution of assets, or as the largest 50 companies in each sector) to that of all other firms. Greater firm age, a proxy of the extent to which a company is well-established in the market, is also associated with a larger drop in revenues throughout the COVID-19 cycle.
Figure 1 Smaller and younger firms often outperformed in terms of revenues during the COVID-19 cycle
Note: Each cell indicates the sign and statistical significance of the coefficient associated with size in 2019 and age in 2019 (dummy variable for top quartile of the sectoral age distribution) in a regression model for the log of firm revenues, with the debt burden measured using the interest coverage ratio and a set of other controls. A negative (positive) coefficient indicates that larger or older firms have performed worse (better) in terms of revenues compared to their smaller or younger counterparts. Country groups with higher and lower policy support are defined based on total fiscal support (above and below the line) excluding contingent liabilities. See Franco, Hitschfeld, Pina and Puy (2023) for further details.
Source: Authors’ calculations based on IMF (2021) and S&P Capital IQ database.
A potential explanation for this finding is that smaller firms tend to operate more locally, both in terms of input purchases and sales, thus being less exposed to the global value chain disruptions and foreign demand shocks seen during the pandemic. For instance, large exporters in France and Portugal have been found to be more affected by the lockdowns adopted during the pandemic (Amador et al. 2023, Bricongne et al. 2022).
Another possible explanation is that policy support was often targeted mainly at smaller firms, potentially fostering their comparative resilience. Yet, when considering subsamples of countries ranked by the extent of fiscal support during the pandemic, we find only limited evidence of greater resilience of smaller firms in higher-support countries. This suggests that the overall scale of policy support is unlikely to have been the main explanation for our findings.
The underperformance of large firms in terms of revenues is driven by firms operating in advanced economies, precisely where concerns about rising concentration have been the strongest in the last decades. The relative performance of smaller and larger firms depends on whether their sector of activity in the respective country was expanding or contracting over the COVID-19 cycle. In contracting industries, the underperformance of larger firms in terms of revenues is noticeable, suggesting that relatively smaller firms might have gained market share in sectors that were hit hardest by the pandemic. In contrast, the effect of firm size is more muted in expanding sectors. Reassuringly, we find no evidence of a size premium in industries that were under scrutiny from a competition standpoint before the pandemic, such as technology and healthcare.
Similar results hold for the ‘unconditional’ role of size in determining revenue performance – the impact of size when excluding the various firm-level controls that we otherwise use in the estimation. This is particularly important for the interpretation of our findings regarding industry concentration. For instance, easier access to finance is one of the major aspects of large firms’ advantage. Our main baseline estimates control for financial fragility and thus do not allow us to exclude the presence of an unconditional size premium – i.e. the possibility that, overall, larger firms have expanded more or contracted less during the COVID-19 crisis when their financing advantage is not controlled for.
Our results also suggest that larger firms invested significantly less than smaller ones during the recovery in 2021 (Figure 2), whereas there is no statistical difference between them in 2020. This result is robust across both advanced economies and EMEs and holds for both expanding and contracting industries, as well as when not controlling for firms’ financial fragility or using different proxies for firm size. It also holds in both higher and lower policy support subsamples. As for revenues, there is no evidence of a size penalty for investment in technology and healthcare sectors, but results do not suggest the existence of a size premium either.
Figure 2 Larger and older firms did not outperform in terms of investment
Note: Each cell indicates the sign and statistical significance of the coefficient associated with size in 2019 and age in 2019 (dummy variable for top quartile of the sectoral age distribution) in a regression model for the log of firm capex, with the debt burden measured using the interest coverage ratio and a set of other controls. A negative (positive) bar indicates that larger or older firms have performed worse (better) in terms of investment spending compared to their smaller or younger counterparts Country groups with higher and lower policy support are defined based on total fiscal support (above and below the line) excluding contingent liabilities. See Franco, Hitschfeld, Pina and Puy (2023) for further details.
Source: Authors’ calculations based on IMF (2021) and S&P Capital IQ database.
Concluding remarks
The absence of a size premium both in terms of revenues and investment has important implications. When the pandemic hit, there were concerns that it could hurt smaller enterprises hardest, particularly in the most affected industries, with resulting increases in industry concentration and market power. There is no evidence from our sample that this has occurred.
That said, a full analysis of the implications of the pandemic for competition is beyond the scope of our analysis. For instance, our sample is one of continuing firms (those with data for 2019, 2020 and 2021), and hence does not account for firm entry and exit. However, as regards continuing firms (the intensive margin), we do not find evidence that the pandemic induced a large and systematic reallocation of sales towards industry leaders, even in sectors that were already under scrutiny from a competition standpoint. In fact, the opposite happened in many industries, both at the height of the COVID-19 pandemic and during the initial recovery. Similarly, we do not find evidence of an investment gap to the detriment of smaller firms. If anything, smaller firms invested relatively more in most sectors when investment rebounded globally during the recovery. The pandemic may have left scars (for instance, through debt overhang effects), but a reduction in competition does not seem to be one of them.
References
Akcigit, U, W Chen, F Diez, R Duval, P Engler, J Fan, C Maggi, M Mendes Tavares, D Schwarz, I Shibata, and C. Villegas-Sánchez (2021), “Rising corporate market power: emerging policy issues”, IMF Staff Discussion Note No. 2021/001.
Amador, J, C M Gouveia and A C Pimenta (2023), “COVID-19, lockdowns and international trade: evidence from firm-level data”, Empirical Economics 65(5): 2427-2466.
Barnes, S, R Hillman, G Wharf, and MacDonald (2021), “How businesses are surviving Covid-19: The resilience of firms and the role of government support”, VoxEU.org, 16 July.
Bricongne, J C, J Carluccio, L Fontagné, G Gaulier, and S Stumpner (2022), “From Macro to Micro: Large Exporters Coping with Common Shocks”, Working Paper No. 881, Banque de France.
Demmou, L, S Calligaris, G Franco and D Dlugosch (2020), “Corporate sector vulnerabilities during the COVID-19 outbreak: Assessment and policy responses”, VoxEU.org, 23 May.
Franco, G, M Hitschfeld, A Pina, and D Puy (2023), “The law of the strongest? Exploring the drivers of firm performance during the COVID-19 crisis”, OECD Economics Department Working Paper No. 1779.
IMF (2021), “Fiscal Monitor Database of Country Fiscal Measures in Response to the COVID-19 Pandemic”.
