Firm Size Matters – An Analysis of Size Effects on Investment Using Firm-level Panel Data

We analyse the effect of firm size on the investment behaviour of German firms within the framework of the Q-theory. Our database contains 2,314 firms covering the time period 1987 to 1998. Descriptive evidence shows small firms to reveal the highest investment ratios. Estimating dynamic Q-investment functions we find very strong negative effects of firm size on investment. The strong negative effect is prevailing even within subgroups of firms based on sector and size. The evidence on the role of cash flow is week. Especially small firms seem unaffected by cash flow, after controlling for investment opportunities via Q. (JEL E22, G32, L00