What Does Fortune 500 Turnover Mean?

Abstract

In The Princess Bride, the lead kidnapper, Vizzini, dismisses missteps in his ill-fated scheme with a frustrated exclamation, “Inconceivable!” At length, his soft-spoken mercenary, Inigo Montoya, ventures: “You keep using that word. I do not think it means what you think it means.” An equivalent asymmetry in the world of economic analysis is the use of turnover on the Fortune 500 list. For years, many people have cited turnover — and ostensibly rising turnover — as a proxy for positive economic churn and rapid changes in the U.S. economy that are supposed to reflect underlying strengths in innovation and productivity. We find that, while annual turnover on the list has, on average, increased since the early 1980s, it doesn’t quite mean what many people think it means. On average, annual turnover (the number of spots on the list that change as companies enter and exit the top 500) was moderate in the late 1950s, then lower and steadier through the 1960s and 1970s. Beginning in the early 1980s, annual turnover rose to historically high levels; by the second half of the 1990s, it touched new highs. After 2000, however, turnover returned to the moderate levels of the late 1950s. It’s easy to paint a narrative around these numbers that coincides with the Great Moderation and the productivity revolution of the 1990s and early 2000s. But reality isn’t so simple. For one thing, turnover among big companies is not a new phenomenon. The late 1950s, as mentioned, experienced moderately high levels of turnover (at least compared to subsequent periods). Prior research has revealed considerable churn among big companies in the early decades of the twentieth century as well. Higher turnover in the 1980s did appear to reflect value creation as corporate conglomerates, ravaged by inflation and competition, were taken apart and remade into separate, more efficient companies. But, in the 1990s, higher turnover reflected (a) methodological changes in how the Fortune list was compiled, and (b) a mergers and acquisition boom, concentrated in a handful of sectors, that destroyed perhaps as much value as it created. Turnover is less a broad economic trend than a discrete temporal and sectoral phenomenon. Still, we point out that the Fortune 500 list — and its changes over time — does provide a meaningful window into American capitalism, even if it doesn’t mean what many think it means. It reflects a kaleidoscopic process of sectoral change and greater efficiencies at the level of individual firms, as well as some less sanguine economic developments. The latter includes the downside of higher volatility — the high M&A volume in the late 1990s included the largest number of the worst deals of the past thirty years — and the deleterious implications for consumers and households. Finally, it appears as if performance among the Fortune 500, as measured by return on equity, did not necessarily improve and, if anything, became more volatile over time.