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Innovation and the firm life cycle

Author

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  • Paudel, Kiran
  • Mukherjee, Tarun

Abstract

A firm's standing relative to its life cycle has significant implications for financial decisions, including its dividend policy. Researchers have advanced several measures to determine a firm's maturity stage, with the foremost being firm age. However, these measures are deficient because they cannot directly measure a firm's growth prospects. Drawing on Mueller's [Journal of Industrial Economics, 20, 3 (1972)] argument that innovation is the primary driver of a firm's growth rate, and employing multivariate analysis, we demonstrate how innovation can suspend the maturity stage and associated financial decisions, such as dividend payouts, by “out-innovating" competitors. We show that innovation enables a company to determine its growth path and stages of its growth-driven life cycle, thus influencing its financial strategy. Further, our research findings show that innovation efficiency, as a life cycle proxy, addresses the shortcomings of prevailing proxies and offers empirically robust refinements to the broader life cycle framework.

Suggested Citation

  • Paudel, Kiran & Mukherjee, Tarun, 2026. "Innovation and the firm life cycle," International Review of Economics & Finance, Elsevier, vol. 105(C).
    • Handle: RePEc:eee:reveco:v:105:y:2026:i:c:s1059056025009591
    DOI: 10.1016/j.iref.2025.104796
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    Keywords

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    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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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