What Does Fortune 500 Turnover Mean?

A study released from the Ewing Marion Kauffman Foundation tests claims by some economists and commentators who have argued that annual turnover on the Fortune 500 list — and its rise over time — is evidence of the strength of U.S. innovation and productivity.

The study concludes that, while the number of spots on the list that change as companies enter and exit the top 500 is an "example of how mind-bendingly and marvelously complex the world of capitalism can be," it is an unreliable economic indicator.

The report, "What Does Fortune 500 Turnover Mean?", confirms that the pace of turnover on the list has escalated since 1980, and rising turnover may have negative implications for consumers and households. However, the churn actually may be driven by idiosyncratic events that are clustered in time and economic sector, rather than by broad economic trends, according to the study's authors, Dane Stangler and Sam Arbesman.

From 1955 to 1993, when the Fortune 500 list included only industrial firms, median turnover was 29 companies per year. Fortune began including non-industrial firms from industries such as commercial banking, diversified financial services, health care, life insurance, retail, transportation and utilities in 1994, and median turnover climbed to 39 per year from 1995 to 2011. Some of the rising volatility in the 1990s likely reflects the higher level of industry diversity, as well as more inherent volatility among service sectors.

Since their entrance onto the Fortune list, service companies have accounted for a larger share of exits and entries than industrial sectors have, with the exception of 1998, when service and industrial firms were even. Over time, as service-based companies come to account for an increasing share of the list, they naturally account for more turnover, as well. Even if service sector companies do not necessarily experience higher turnover, simply casting a wider sectoral net increases the probability of turnover because of broader economic representation.

Firms also often enter and exit the list multiple times, with each counting as a turnover. Over the past 50 years, 1,332 companies have come and gone once, and 248 companies have come and gone twice – with one company making and then dropping off the list 14 times. This factor, the report says, reveals more about companies' revenue performance than about larger economic trends.

Fortune 500 turnover does, however, expose changes in technology, capital markets and the divergent fates of various economic sectors. For example, mergers and acquisitions have generated considerable turnover among large companies, whether public or private, because M&A activity affects rankings, as well as movement on and off the list. In addition, changes in Fortune 500 turnover, particularly higher annual volatility, could be related to increases in IPOs, which represent more competitors, more acquisition targets and the rise of newer industries, and which would be reflected in Fortune 500 turnover as those newly public companies grew.