How does your garden grow? The interface of employee and sales growth post IPO

Abstract

Research Summary: Firms often succumb to a growth imperative, yet little is known about how congruence between various forms of growth affects firm value. We argue that the (in)congruence between net hiring rates (e.g., growth in the number of employees) and sales growth has significant implications for firm value, assessed via Tobin's Q. We further contend that R&D expenditures and industry dynamism—factors that influence a firm's ability to realize value creation—moderate the relationship between growth pattern and firm value. We use a sample of 1,181 firms that conducted their initial public offerings from 1996 to 2006 to test our conceptual model. Findings indicate that employee-dominant growth is most strongly associated with firm value, and that high levels of R&D expenditures and industry dynamism intensify these relationships. Managerial Summary: Growth is a goal and challenge for many firms, and navigating the various demands of growth represents a particularly promising opportunity for firms that recently went public. We study how firms can manage the growth process in a way that enhances firm value. Using a sample of 1,181 firms that conducted their initial public offerings from 1996 to 2006, we explore the interplay of employee and sales growth rates on value creation. We find that an employee-dominant growth pattern was more strongly related to firm value than the other patterns. Our findings also suggest that managers, especially those in firms that invest in R&D and operating in dynamic industries, should avoid a strong focus on sales growth without also ensuring growth in employees.