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Reaching Economies of Scale to Be a Viable Ongoing Entity

Author

Listed:
  • Michael S. Long

    (Rutgers Business School – Newark, 1 Washington Park Place, Newark, NJ 07102, USA)

  • Isuru Devaka Wijeyaratne

    (Reval, 420 5th Ave., New York, NY 10018, USA)

Abstract

This paper empirically considers economies of scale that firms must reach to be considered viable ongoing entities. These are estimated from the selling prices of actual firms in two broad industries — service and manufacturing. For service firms, the minimum size is $10 million in annual revenues and for manufacturing firms, it is smaller at $6 million in sales to reach economies of scale.Traditional economic theory considers firms becoming more efficient with increasing size until they reach an optimal economy of scale. Until they reach that size, we show that they cannot be considered truly ongoing firms and cannot be valued directly as the present value of future earnings. When firms are also independent of their owner/manager, we consider that aviable ongoing entityexists.

Suggested Citation

  • Michael S. Long & Isuru Devaka Wijeyaratne, 2013. "Reaching Economies of Scale to Be a Viable Ongoing Entity," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 16(03), pages 1-21.
    • Handle: RePEc:wsi:rpbfmp:v:16:y:2013:i:03:n:s021909151350015x
    DOI: 10.1142/S021909151350015X
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    References listed on IDEAS

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    1. Fernández, Pablo, 2002. "Valuation using multiples. How do analysts reach their conclusions?," IESE Research Papers D/450, IESE Business School.
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    More about this item

    Keywords

    Economies of scale; going concern; D24; M21; M42;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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