IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v69y2016icp95-107.html
   My bibliography  Save this article

Do corporate policies follow a life-cycle?

Author

Listed:
  • Faff, Robert
  • Kwok, Wing Chun
  • Podolski, Edward J.
  • Wong, George

Abstract

We examine whether corporate investment, financing, and cash policies are interdependent and follow a predictable pattern in line with the firm life-cycle. We find that investments and equity issuance decrease with firm life-cycle, while debt issuance and cash holdings increase in the introduction and growth stages and decrease in the mature and shake-out/decline stages of the firm’s life-cycle. These results are robust after using various proxies for life-cycle and controlling for firm, CEO and board level characteristics. Collectively, our results show that corporate policies follow a firm life-cycle.

Suggested Citation

  • Faff, Robert & Kwok, Wing Chun & Podolski, Edward J. & Wong, George, 2016. "Do corporate policies follow a life-cycle?," Journal of Banking & Finance, Elsevier, vol. 69(C), pages 95-107.
    • Handle: RePEc:eee:jbfina:v:69:y:2016:i:c:p:95-107
    DOI: 10.1016/j.jbankfin.2016.04.009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426616300413
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2016.04.009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gilchrist, Simon & Himmelberg, Charles P., 1995. "Evidence on the role of cash flow for investment," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 541-572, December.
    2. Steven M. Fazzari & Bruce C. Petersen, 1993. "Working Capital and Fixed Investment: New Evidence on Financing Constraints," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 328-342, Autumn.
    3. Lemmon, Michael L. & Zender, Jaime F., 2010. "Debt Capacity and Tests of Capital Structure Theories," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(5), pages 1161-1187, October.
    4. Lawrence Fisher, 1959. "Determinants of Risk Premiums on Corporate Bonds," Journal of Political Economy, University of Chicago Press, vol. 67, pages 217-217.
    5. Jaffee, Dwight M., 1975. "Cyclical variations in the risk structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 1(3), pages 309-325, July.
    6. Robert E. Quinn & Kim Cameron, 1983. "Organizational Life Cycles and Shifting Criteria of Effectiveness: Some Preliminary Evidence," Management Science, INFORMS, vol. 29(1), pages 33-51, January.
    7. Chava, Sudheer & Purnanandam, Amiyatosh, 2010. "CEOs versus CFOs: Incentives and corporate policies," Journal of Financial Economics, Elsevier, vol. 97(2), pages 263-278, August.
    8. Heitor Almeida & Murillo Campello, 2007. "Financial Constraints, Asset Tangibility, and Corporate Investment," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1429-1460, 2007 12.
    9. Itzhak Ben-David & John R. Graham, 2013. "Managerial Miscalibration," The Quarterly Journal of Economics, Oxford University Press, vol. 128(4), pages 1547-1584.
    10. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    11. Lang, Larry & Ofek, Eli & Stulz, Rene M., 1996. "Leverage, investment, and firm growth," Journal of Financial Economics, Elsevier, vol. 40(1), pages 3-29, January.
    12. Greenwald, Bruce & Stiglitz, Joseph E & Weiss, Andrew, 1984. "Informational Imperfections in the Capital Market and Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 74(2), pages 194-199, May.
    13. Acharya, Viral V. & Almeida, Heitor & Campello, Murillo, 2007. "Is cash negative debt? A hedging perspective on corporate financial policies," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 515-554, October.
    14. Paul Gompers & Joy Ishii & Andrew Metrick, 2003. "Corporate Governance and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 107-156.
    15. Mark T. Leary & Michael R. Roberts, 2005. "Do Firms Rebalance Their Capital Structures?," Journal of Finance, American Finance Association, vol. 60(6), pages 2575-2619, December.
    16. Malmendier, Ulrike & Tate, Geoffrey, 2008. "Who makes acquisitions? CEO overconfidence and the market's reaction," Journal of Financial Economics, Elsevier, vol. 89(1), pages 20-43, July.
    17. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    18. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    19. Chay, J.B. & Suh, Jungwon, 2009. "Payout policy and cash-flow uncertainty," Journal of Financial Economics, Elsevier, vol. 93(1), pages 88-107, July.
    20. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    21. Michael Faulkender & Rong Wang, 2006. "Corporate Financial Policy and the Value of Cash," Journal of Finance, American Finance Association, vol. 61(4), pages 1957-1990, August.
    22. DeAngelo, Harry & DeAngelo, Linda & Stulz, Rene M., 2006. "Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory," Journal of Financial Economics, Elsevier, vol. 81(2), pages 227-254, August.
    23. Han, Seungjin & Qiu, Jiaping, 2007. "Corporate precautionary cash holdings," Journal of Corporate Finance, Elsevier, vol. 13(1), pages 43-57, March.
    24. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    25. Almeida, Heitor & Campello, Murillo, 2010. "Financing Frictions and the Substitution between Internal and External Funds," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(3), pages 589-622, June.
    26. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    27. Froot, Kenneth A & Scharfstein, David S & Stein, Jeremy C, 1993. "Risk Management: Coordinating Corporate Investment and Financing Policies," Journal of Finance, American Finance Association, vol. 48(5), pages 1629-1658, December.
    28. Henrik Cronqvist & Rüdiger Fahlenbrach, 2009. "Large Shareholders and Corporate Policies," The Review of Financial Studies, Society for Financial Studies, vol. 22(10), pages 3941-3976, October.
    29. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
    30. Chang, Xin & Fu, Kangkang & Low, Angie & Zhang, Wenrui, 2015. "Non-executive employee stock options and corporate innovation," Journal of Financial Economics, Elsevier, vol. 115(1), pages 168-188.
    31. Polli, Rolando & Cook, Victor, 1969. "Validity of the Product Life Cycle," The Journal of Business, University of Chicago Press, vol. 42(4), pages 385-400, October.
    32. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    33. Huang, Rongbing & Ritter, Jay R., 2009. "Testing Theories of Capital Structure and Estimating the Speed of Adjustment," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(2), pages 237-271, April.
    34. Danny Miller & Peter H. Friesen, 1984. "A Longitudinal Study of the Corporate Life Cycle," Management Science, INFORMS, vol. 30(10), pages 1161-1183, October.
    35. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    36. David Hirshleifer & Angie Low & Siew Hong Teoh, 2012. "Are Overconfident CEOs Better Innovators?," Journal of Finance, American Finance Association, vol. 67(4), pages 1457-1498, August.
    37. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, August.
    38. DeAngelo, Harry & DeAngelo, Linda & Stulz, René M., 2010. "Seasoned equity offerings, market timing, and the corporate lifecycle," Journal of Financial Economics, Elsevier, vol. 95(3), pages 275-295, March.
    39. Hutton, Irena & Jiang, Danling & Kumar, Alok, 2014. "Corporate Policies of Republican Managers," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(5-6), pages 1279-1310, December.
    40. Jovanovic, Boyan, 1982. "Selection and the Evolution of Industry," Econometrica, Econometric Society, vol. 50(3), pages 649-670, May.
    41. Gustavo Grullon & Roni Michaely & Bhaskaran Swaminathan, 2002. "Are Dividend Changes a Sign of Firm Maturity?," The Journal of Business, University of Chicago Press, vol. 75(3), pages 387-424, July.
    42. Xin Chang & Sudipto Dasgupta & George Wong & Jiaquan Yao, 2014. "Cash-Flow Sensitivities and the Allocation of Internal Cash Flow," Review of Financial Studies, Society for Financial Studies, vol. 27(12), pages 3628-3657.
    43. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    44. Owen, Sian & Yawson, Alfred, 2010. "Corporate life cycle and M&A activity," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 427-440, February.
    45. Altinkilic, Oya & Hansen, Robert S, 2000. "Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs," Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 191-218.
    46. Kraus, Alan & Litzenberger, Robert H, 1973. "A State-Preference Model of Optimal Financial Leverage," Journal of Finance, American Finance Association, vol. 28(4), pages 911-922, September.
    47. Fung, W K H & Rudd, Andrew, 1986. "Pricing New Corporate Bond Issues: An Analysis of Issue Cost and Seasoning Effects," Journal of Finance, American Finance Association, vol. 41(3), pages 633-643, July.
    48. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165, Elsevier.
    49. Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(3), pages 335-359, September.
    50. DeAngelo, Harry & DeAngelo, Linda, 2006. "The irrelevance of the MM dividend irrelevance theorem," Journal of Financial Economics, Elsevier, vol. 79(2), pages 293-315, February.
    51. Campbell, T. Colin & Gallmeyer, Michael & Johnson, Shane A. & Rutherford, Jessica & Stanley, Brooke W., 2011. "CEO optimism and forced turnover," Journal of Financial Economics, Elsevier, vol. 101(3), pages 695-712, September.
    52. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tut, Daniel, 2021. "Financial Crisis, Corporate Governance and the Value of Cash Holdings," MPRA Paper 108593, University Library of Munich, Germany.
    2. Muhammad Atif & Benjamin Liu & Sivathaasan Nadarajah, 2022. "The effect of corporate environmental, social and governance disclosure on cash holdings: Life‐cycle perspective," Business Strategy and the Environment, Wiley Blackwell, vol. 31(5), pages 2193-2212, July.
    3. Sai Ding & Minjoo Kim & Xiao Zhang, 2021. "New Insight on Investment-Cash Flow Sensitivity," Working Papers 2021_16, Business School - Economics, University of Glasgow.
    4. Abdul Rashid & Noshaba Jabeen, 2018. "Financial frictions and the cash flow – external financing sensitivity: evidence from a panel of Pakistani firms," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 4(1), pages 1-20, December.
    5. Kim, Sang-Joon & Bae, John & Oh, Hannah, 2019. "Financing strategically: The moderation effect of marketing activities on the bifurcated relationship between debt level and firm valuation of small and medium enterprises," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 663-681.
    6. Mai, Nhat Chi, 2012. "Market timing, taxes and capital structure: evidence from Vietnam," OSF Preprints t3mvs, Center for Open Science.
    7. Yang, Junhong & Guariglia, Alessandra & Guo, Jie (Michael), 2019. "To what extent does corporate liquidity affect M&A decisions, method of payment and performance? Evidence from China," Journal of Corporate Finance, Elsevier, vol. 54(C), pages 128-152.
    8. Stein, Jeremy C., 2003. "Agency, information and corporate investment," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 2, pages 111-165, Elsevier.
    9. Gao, Ning & Mohamed, Abdulkadir, 2018. "Cash-rich acquirers do not always make bad acquisitions: New evidence," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 243-264.
    10. Danso, Albert & Lartey, Theophilus & Amankwah-Amoah, Joseph & Adomako, Samuel & Lu, Qinye & Uddin, Moshfique, 2019. "Market sentiment and firm investment decision-making," International Review of Financial Analysis, Elsevier, vol. 66(C).
    11. Cristina Martínez-Sola & Pedro J. García-Teruel & Pedro Martínez-Solano, 2018. "Cash holdings in SMEs: speed of adjustment, growth and financing," Small Business Economics, Springer, vol. 51(4), pages 823-842, December.
    12. Xin Qu & Majella Percy & Fang Hu & Jenny Stewart, 2022. "Can CEO equity‐based compensation limit investment‐related agency problems?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2579-2614, June.
    13. Efstathios Magerakis & Ahsan Habib, 2022. "Environmental uncertainty and corporate cash holdings: The moderating role of CEO ability," International Review of Finance, International Review of Finance Ltd., vol. 22(3), pages 402-432, September.
    14. I-Ju Chen & Shin-Hung Lin, 2013. "Managerial Optimism, Investment Efficiency, and Firm Valuation," Multinational Finance Journal, Multinational Finance Journal, vol. 17(3-4), pages 295-340, September.
    15. Paulo, Alves, 2018. "Abnormal retained earnings around the world," Journal of Multinational Financial Management, Elsevier, vol. 46(C), pages 63-74.
    16. Podolski, Edward J. & Truong, Cameron & Veeraraghavan, Madhu, 2016. "Cash holdings and bond returns around takeovers," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 1-11.
    17. Dang, Viet Anh & Kim, Minjoo & Shin, Yongcheol, 2014. "Asymmetric adjustment toward optimal capital structure: Evidence from a crisis," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 226-242.
    18. Choonsik Lee & Heungju Park, 2016. "Financial constraints, board governance standards, and corporate cash holdings," Review of Financial Economics, John Wiley & Sons, vol. 28(1), pages 21-34, January.
    19. Maurizio Rocca & Raffaele Staglianò & Tiziana Rocca & Alfio Cariola & Ekaterina Skatova, 2019. "Cash holdings and SME performance in Europe: the role of firm-specific and macroeconomic moderators," Small Business Economics, Springer, vol. 53(4), pages 1051-1078, December.
    20. Christopher F. Baum & Mustafa Caglayan & Oleksandr Talavera, 2013. "The Effects of Future Capital Investment and R&D Expenditures on Firms' Liquidity," Review of International Economics, Wiley Blackwell, vol. 21(3), pages 459-474, August.

    More about this item

    Keywords

    Life-cycle theory; Investment decisions; Financing decisions; Cash policy;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:69:y:2016:i:c:p:95-107. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.