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Profitability and the lifecycle of firms

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  • Warusawitharana Missaka

    (Board of Governors of the Federal Reserve System, Division of Supervision and Regulation, Mail Stop 1814, 20th and C Street NWWashington, DC 20551, United States of America)

Abstract

Using data on private and public firms, this study documents that profitability follows a hump shape over the lifecycle of a firm. Profitability rises with age for young firms, remains elevated, and then declines slowly for mature firms. A dynamic lifecycle model captures the observed age profile of profitability. Investment in product development generates profitability increases for young firms while wage pressures from more productive entrants lead to profitability declines for mature firms. The model generates the lifecycle behavior of financing and growth documented in the literature, even though it contains no financial frictions. It also implies greater sensitivity of financing and growth to age for young firms, a prediction supported by empirical tests. Taken together, these findings indicate that profitability dynamics influence the financing and growth of firms over the lifecycle.

Suggested Citation

  • Warusawitharana Missaka, 2018. "Profitability and the lifecycle of firms," The B.E. Journal of Macroeconomics, De Gruyter, vol. 18(2), pages 1-30, June.
    • Handle: RePEc:bpj:bejmac:v:18:y:2018:i:2:p:30:n:6
    DOI: 10.1515/bejm-2017-0124
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    4. Thuy Hang Do, 2014. "Determinants of Innovation Commercialization Management and Anticipated Returns: An Exploratory Typology of SMEs," International Journal of Innovation and Technology Management (IJITM), World Scientific Publishing Co. Pte. Ltd., vol. 11(06), pages 1-20.
    5. Giorgio Calcagnini & Annalisa Ferrando & Germana Giombini, 2015. "Multiple market imperfections, firm profitability and investment," European Journal of Law and Economics, Springer, vol. 40(1), pages 95-120, August.
    6. Giovanni Dosi & Emanuele Pugliese & Pietro Santoleri, 2017. "Growth and survival of the `fitter'? Evidence from US new-born firms," LEM Papers Series 2017/06, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    7. Ralf R. Meisenzahl, 2016. "Can Financing Constraints Explain the Evolution of the Firm Size Distribution?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 48(2), pages 123-147, March.
    8. Nomita Sharma, 2017. "Innovative Behaviour Of Indian Micro Small And Medium Enterprises: An Empirical Study," International Journal of Innovation Management (ijim), World Scientific Publishing Co. Pte. Ltd., vol. 21(07), pages 1-19, October.
    9. Tran, Hien Thu, 2019. "Institutional quality and market selection in the transition to market economy," Journal of Business Venturing, Elsevier, vol. 34(5), pages 1-1.
    10. Zanxin Wang & Minhas Akbar & Ahsan Akbar, 2020. "The Interplay between Working Capital Management and a Firm’s Financial Performance across the Corporate Life Cycle," Sustainability, MDPI, vol. 12(4), pages 1-16, February.
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    13. Liu, Hao & Zhang, Hao & Gao, Ya-Chun & Chen, Xu-Dong, 2022. "Firm age and beta: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 244-261.

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    More about this item

    Keywords

    financial frictions; firm lifecycles; profitability; quality ladder;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General

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