Cash Flow Patterns as a Proxy for Firm Life Cycle

2011 ◽  
Vol 86 (6) ◽  
pp. 1969-1994 ◽  
Author(s):  
Victoria Dickinson
Keyword(s):  
Life Cycle ◽  
Cash Flow ◽  
Control Variable ◽  
Life Cycle Stage ◽  
Flow Patterns ◽  
Data Availability ◽  
Future Research ◽  
Firm Life Cycle ◽  
Differential Behavior ◽  
Asset Turnover

ABSTRACT This study develops a firm life cycle proxy using cash flow patterns. The patterns provide a parsimonious indicator of life cycle stage that is free from distributional assumptions (i.e., uniformity). The proxy identifies differential behavior in the persistence and convergence patterns of profitability. For example, return on net operating assets (RNOA) does not mean-revert (spread of 7 percent after five years between mature and decline firms) when examined by life cycle stage, which has implications for growth rates and forecast horizons. Further, determinants of future profitability such as asset turnover and profit margin are differentially successful in generating increases in profitability conditional on life cycle stage. Finally, investors do not fully incorporate the information contained in cash flow patterns and, as a result, undervalue mature firms. The cash flow proxy is a robust tool that has applications in analysis, forecasting, valuation, and as a control variable for future research. Data Availability: All data are available from public sources identified in the paper.

scholarly journals The Influence of Cash Flow Patterns on Random Organizational Development in Nigerian Listed Companies

2020 ◽  
Vol 11 (3) ◽  
pp. 171
Author(s):  
Chizoba Ekwueme ◽  
Rosemary Obiageri Obasi ◽  
Sadiq Rabiu Abdullahi ◽  
Umar Aliyu Mustapha ◽  
Norfadzilah Rashid
Keyword(s):  
Life Cycle ◽  
Cash Flow ◽  
Developmental Stages ◽  
Stock Exchange ◽  
Listed Companies ◽  
Life Cycle Stage ◽  
Flow Patterns ◽  
Annual Reports ◽  
Mature Stage ◽  
Growth Stages

The objective of this study is to examine whether companies’ life cycle stages follow a random or sequential developmental pattern using their cash flow patterns. That is to ascertain the optimum life cycle stage of Nigerian companies. Data were obtained from the sampled firms annual reports and accounts, which comprises 79 listed companies on the Nigerian Stock Exchange (NSE) from 2009 to 2013 financial years. The cash flow patterns of the firms were thematically analysed as a proxy of developmental patterns, and transition rates between developmental stages were determined. The study reveals that Introduction firms at T0 transited quickly to the Mature stage (70% in T1 through T3), whereas Growth firms developed most rapidly into Shakeout firms (38% at T1). The Mature stage was most stable; 57–65% of firms in this stage at T0 remained so. By contrast, 60% of Decline firms remained in this stage at T1 before transiting to the Mature and Growth stages at T3 and then ultimately fading away at T4, leaving only the Introduction (20%) and Decline (20%) stages. Thus, the development of firms from one life cycle stage to another is random and not sequential. The study, therefore, recommends that Nigerian companies experience their optimum life cycle stage at the matured stage and firms should employ the use of cash flow patterns to identify their business life cycle stage as this will enable companies to apply strategies to sustain themselves at a target stage of the life cycle.

The Corporate Life Cycle and the Cost of Equity

2019 ◽  
Vol 14 (1) ◽  
Author(s):  
Sergio Bravo
Keyword(s):  
Life Cycle ◽  
Cash Flow ◽  
Cost Of Capital ◽  
Theory And Practice ◽  
Cost Of Equity ◽  
Firm Life Cycle ◽  
Link Type ◽  
Life Cycle Stages ◽  
Corporate Life Cycle ◽  
The Cost

Abstract A widely used methodology for estimating the beta of companies with the Capital Asset Pricing Model (CAPM) uses comparable firms based only on industry or sector classifications (Bancel, F., and U. R. Mittoo. 2014. “The Gap between the Theory and Practice of Corporate Valuation: Survey of European Experts.” Journal of Applied Corporate Finance 26, no. 4 (Fall): 106–17. doi:https://doi.org/10.1111/jacf.12095, 112; KPMG. 2017. “Cost of Capital Study 2017: Diverging Markets, Converging Business Models.” Accessed September 28, 2018. https://assets.kpmg.com/content/dam/kpmg/ch/pdf/cost-of-capital-study-2017-en.pdf, 37). We hypothesize that even within industries, there is a significant relationship between the cost of equity and the life cycle of a firm. We argue that these variables are correlated because different life-cycle stages exhibit different degrees of systematic risk. Therefore, as the firm moves along its life cycle, its unlevered beta decreases. We define the stages of the firm life cycle based on a modification of the theoretical typology of (Miller, D., and P. Friesen. 1984. “A Longitudinal Study of the Corporate Life-Cycle.” Management Sciences 30 (10): 1161–83. http://www.jstor.org/stable/2631384, 1162–3) and then classify a sample of listed companies into these stages using (Dickinson, V. 2011. “Cash Flow Patterns as a Proxy for Firm Life-Cycle.” The Accounting Review 86 (6): 1969–94. doi:https://doi.org/10.2308/accr-10130) cash flow statements methodology. We construct value-weighted portfolios that are formed based on our life-cycle stages classification, adapting the procedure of (Fama, E., and K. R. French. 1993. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics 33 (1): 3–56. doi:https://doi.org/10.1016/0304-405X(93)90023-5). Finally, we compare the betas (levered and unlevered) of these portfolios to determine whether there are statistically significant differences. Our results show clear evidence of a relationship between betas and the corporate life cycle and that this relationship is robust to both changes in the period of analysis and omitted variables bias (when controlling with the four-factor model of (Carhart, M. M. 1997. “On Persistence in Mutual Fund Performance.” The Journal of Finance 52 (1): 57–82. doi:https://doi.org/10.1111/j.1540-6261.1997.tb03808.x). We believe our results show an important shortcoming in a widely used methodology among practitioners for estimating the CAPM.

Implementing Relative Performance Evaluation: The Role of Life Cycle Peers

2019 ◽  
Vol 32 (2) ◽  
pp. 107-135
Author(s):  
Katharine D. Drake ◽  
Melissa A. Martin
Keyword(s):  
Performance Evaluation ◽  
Life Cycle ◽  
Peer Group ◽  
Life Cycle Stage ◽  
Relative Performance ◽  
Data Availability ◽  
Relative Performance Evaluation ◽  
Peer Selection ◽  
Exogenous Shocks

ABSTRACT The effectiveness of relative performance evaluation (RPE) in compensation contracts depends on a firm's ability to identify peers that are subject to similar exogenous shocks with similar abilities to respond to such shocks. We expand the RPE literature by considering whether firms routinely select peers sharing a life cycle stage in RPE implementation. We argue that life cycle captures similarities in underlying economics and homogeneity along a number of dimensions relevant in filtering systematic performance. Using explicit peer firm disclosures and a peer selection model, we show that firms routinely select life cycle peers. Further, using implicit RPE tests, we document evidence of life cycle peers filtering common performance incremental to previously identified peer groups. We provide some of the first evidence that peer group composition differs with differing characteristics of the firm and its industry, highlighting that peer selection is a dynamic process evolving with the firm's changing nature. JEL Classifications: E32; J33; L2. Data Availability: All data are available from public sources.

Toward a life cycle theory of board evolution: Considering firm legitimacy

2015 ◽  
Vol 21 (5) ◽  
pp. 627-649 ◽  
Author(s):  
Elise Perrault ◽  
Patrick McHugh
Keyword(s):  
Life Cycle ◽  
Boards Of Directors ◽  
Life Cycle Stage ◽  
Future Research ◽  
Effect Change ◽  
Managerial Practice ◽  
Board Characteristics ◽  
Life Cycle Theory

AbstractIn this article, we build on recent attempts to theorize about the evolution of boards of directors by juxtaposing firms’ strategies to gain, maintain, and repair legitimacy onto their life cycle to examine how board characteristics change – both symbolically and substantively – to reflect their firm’s evolving legitimating strategy. In doing so, we develop insights contributing to our understanding of the mechanisms underpinning the evolving structure and composition of boards of directors. We suggest that boards fulfill an important role ingrained in the firm’s legitimacy in addition to, and intertwined with, their substantive contribution to the firm’s performance at each life cycle stage. We also address firms’ real ability to effect change in their board as a function of the factors that pertain to each stage of life cycle. We conclude by expounding the implications of this novel framework for future research and managerial practice.

scholarly journals The Association Between Cash Flow and Leverage for Firm Life Cycle

2018 ◽  
Vol 3 (10) ◽  
Author(s):  
Yuliani . ◽  
Isnurhadi . ◽  
D Utami
Keyword(s):  
Life Cycle ◽  
Cash Flow ◽  
Firm Life Cycle

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