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Limited Managerial Attention and Corporate Aging

  • Loderer, Claudio F.

    (Institute for Financial Management, University of Bern)

  • Stulz, Rene M.

    (OH State University and ECGI, Brussels)

  • Waelchli, Urs

    (Institute for FInancial Management, University of Bern)

As firms have more assets in place, more of management's limited attention is focused on managing assets in place rather than developing new growth options. Consequently, as firms grow older, they have fewer growth options and a lower ability to generate new growth options. This simple theory predicts that Tobin's q falls with age. Further, competition in the product market is expected to slow down the decrease in Tobin's q because it forces firms to look for alternative sources of rents. Similarly, greater competition in the labor market reduces the decrease in Tobin's q with age because old firms are in a better position to hire employees that can help with innovation. In contrast, competition in the market for corporate control should accelerate the decline because it forces management to focus more on managing assets in place whose performance is more directly observable than on developing growth options where results may not be observable for some time. We find strong support for these predictions in tests using exogenous variation in competition.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2013-13.

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Date of creation: Sep 2013
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Handle: RePEc:ecl:ohidic:2013-13
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