The Cyclical Growth of Public Firms and the COVID Crisis

We document a significant but declining size effect and cyclicality in sales growth within U.S. public firms, including the COVID crisis. The patterns differ significantly from those documented in prior studies which focus on samples dominated by private firms. Small public firms grow faster than large public firms since the start of our sample period in 1974, especially during expansions, but the gap declines significantly starting in early 2000s and closes entirely during the 2020 recession. Contrary to the prevailing view in the literature, financing constraints do not explain the size effect, and the effect is stronger in 2020 than in the Great Recession during which constraints were, arguably, more severe. We examine alternative explanations for the size effect, including diversification, fallen angels, and differences in investment opportunities. Preliminary analysis shows evidence inconsistent with the first two hypotheses. The size effect increases market shares of large firms in recession, but this is counteracted by new entry, thus, mitigating the effects on industry structures across business cycles.