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Firm age and performance

Author

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  • Loderer, Claudio
  • Waelchli, Urs

Abstract

As firms grow older, their profitability seems to decline. We first document this phenomenon and show that it is very robust. Then we offer two non-exclusive explanations of why firms may age. First, corporate aging could reflect a cementation of organizational rigidities over time. Consistent with that, costs rise, growth slows, assets become obsolete, and investment and R&D activities decline. Second, older age could advance the diffusion of rent-seeking behavior inside the firm. This hypothesis is supported by the poorer governance, larger boards, and higher CEO pay we observe in older firms. Overall, firms seem to face a real senescence problem.

Suggested Citation

  • Loderer, Claudio & Waelchli, Urs, 2010. "Firm age and performance," MPRA Paper 26450, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:26450
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    References listed on IDEAS

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    2. Kashif Rashid & Seep Nadeem, 2014. "The Role of Ownership Concentration, its Types and Firm Performance: A Quantitative Study of Financial Sector in Pakistan," Oeconomics of Knowledge, Saphira Publishing House, vol. 6(2), pages 10-61, June.
    3. Stefan Hirsch & Adelina Gschwandtner, 2013. "Profit persistence in the food industry: evidence from five European countries," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 40(5), pages 741-759, December.
    4. Faisal Khan & Saif-Ur-Rehman Khan & Hashim Khan, 2016. "Pricing of Risk, Various Volatility Dynamics and Macroeconomic Exposure of Firm Returns: New Evidence on Age Effect," International Journal of Economics and Financial Issues, Econjournals, vol. 6(2), pages 551-561.
    5. Loderer, Claudio F. & Stulz, Rene M. & Waelchli, Urs, 2013. "Limited Managerial Attention and Corporate Aging," Working Paper Series 2013-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    6. Wooster, Rossitza B. & Blanco, Luisa & Sawyer, W. Charles, 2016. "Equity commitment under uncertainty: A hierarchical model of real option entry mode choices," International Business Review, Elsevier, vol. 25(1), pages 382-394.
    7. Ball, Ryan & Ghysels, Eric & Zhou, Huan, 2014. "Can we Automate Earnings Forecasts and Beat Analysts?," CEPR Discussion Papers 10186, C.E.P.R. Discussion Papers.
    8. Low, Daniel C.M. & Roberts, Helen & Whiting, Rosalind H., 2015. "Board gender diversity and firm performance: Empirical evidence from Hong Kong, South Korea, Malaysia and Singapore," Pacific-Basin Finance Journal, Elsevier, vol. 35(PA), pages 381-401.
    9. Elif Akben-Selcuk, 2016. "Factors Affecting Firm Competitiveness: Evidence from an Emerging Market," International Journal of Financial Studies, MDPI, Open Access Journal, vol. 4(2), pages 1-10, May.
    10. Ben Soltane BASSEM, 2011. "Governance Quality and MFIS Repayment Performance," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 8, pages 159-168, December.
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    13. Elif Akben-Selcuk, 2016. "Does Firm Age Affect Profitability? Evidence from Turkey," International Journal of Economic Sciences, International Institute of Social and Economic Sciences, vol. 5(3), pages 1-9, September.
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    16. Tomislava Pavic Kramaric & Marina Lolic Cipcic & Marko Miletic, 2017. "Has the Financial Crisis Affected the Profitability of Banks in Croatia?," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 7(3), pages 1-2.
    17. Zouaghi, Ferdaous & Hirsch, Stefan & Garcia, Mercedes Sanchez, 2016. "What Drives Firm Profitability? A Multilevel Approach To The Spanish Agri-Food Sector," 56th Annual Conference, Bonn, Germany, September 28-30, 2016 244762, German Association of Agricultural Economists (GEWISOLA).
    18. Sunil Kanwar, 2013. "Innovation, Productivity and IPRs," Working papers 230, Centre for Development Economics, Delhi School of Economics.
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    More about this item

    Keywords

    firm age; organizational rigidities; rent-seeking; firm life cycle; corporate governance; firm performance;

    JEL classification:

    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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