CORPORATE LIFE CYCLE METHODS IN EMERGING MARKETS: EVIDENCE FROM TURKEY

Abstract

Purpose - This paper focuses on the corporate life cycle concept which is one of the vital theories to analyze the firms more homogeneously. The aim of this study is to elaborate main life cycle classification procedures and to compare the most cited methodologies regarding financial indicators according to the expectations from the stages.

Methodology - We review the literature and especially examine three firm life cycle methods; Anthony and Ramesh (1992), Yonpae and Chen (2006) and Dickinson (2011). We also develop five hypotheses that are related to firm size, profitability, stock returns, liquidity and risk of the firms for three different stages through using descriptive statistics and t test.

Findings -  According to the results, while growth firms have higher risk, mature firms are more profitable and get higher stock returns. On the other hand, decline firms are bigger and more liquid than the other stages. The findings also suggest that Anthony and Ramesh (1992) life cycle classification procedure provides a little better insight than the other methods.

Conclusion - The study defines the firm life cycle notion which is an expanded version of product life cycle through explaining the most common classification procedures. Investors should concentrate on firms that are at growth stage since they have more potential to receive profitable projects. However, mature firms are at the peak point of the profitability and the risk is relatively low. Firms at the decline stage are one of the biggest candidates of stagnation and the capacity cannot be fully utilized.

Keywords

• Corporate life cycle,accounting performance,financial ratios,life cycle stages

References

1. Adizes, I. 1979, "Organizational Passages-Diagnosing and Treating Lifecycle Problems of Organizations." Organizational Dynamics, 8(1), 3-25.
2. Aharony, J., Falk, H. & Yehuda, N. 2006, "Corporate Life Cycle and the Relative Value-Relevance of Cash Flow Versus Accrual Financial Information" Working Paper, Citeseer.
3. Anthony, J. H. & Ramesh, K. 1992, "Association Between Accounting Performance Measures and Stock Prices: A Test of the Life-Cycle Hypothesis." Journal of Accounting and Economics, 15(2), 203-227.
4. Black, E. L. 1998a, "Life-Cycle Impacts on the Incremental Value-Relevance of Earnings and Cash Flow Measures." Journal of Financial Statement Analysis, 4, 40-57.
5. Black, E. L. 1998b, "Which is More Value-Relevant: Earnings or Cash Flows?" Working Paper, Available at SSRN 118089.
6. Chen, X., Yang, W. & Huang, D. 2010, "Corporate Life Cycle and the Accrual Model: An Empirical Study Based on Chinese Listed Companies." Frontiers of Business Research in China, 4(4), 580-607.
7. DeAngelo, H., DeAngelo, L. & Stulz, R. M. 2006, "Dividend Policy and the Earned/Contributed Capital Mix: A Test of the Life-Cycle Theory." Journal of Financial Economics, 81(2), 227-254.
8. Dickinson, V. 2011, "Cash Flow Patterns as a Proxy for Firm Life Cycle." The Accounting Review, 86(6), 1969-1994.

9. Fama, E. F. & French, K. R. 2001, "Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?" Journal of Financial Economics, 60(1), 3-43.
10. Gaver, J. J. & Gaver, K. M. 1993, "Additional Evidence on the Association Between the Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies." Journal of Accounting and Economics, 16(1-3), 125-160.
11. Gort, M. & Klepper, S. 1982, "Time Paths in the Diffusion of Product Innovations." The Economic Journal, 92(367), 630-653.
12. Grabowski, H. G. & Mueller, D. C. 1975 "Life-Cycle Effects on Corporate Returns on Retentions." The Review of Economics and Statistics,
13. Hayn, C. 1995, "The information Content of Losses." Journal of Accounting and Economics, 20(2), 125-153.
14. Jaafar, H. & Halim, H. A. 2015, "Refining the Firm Life Cycle Classification Method: A Firm Value Perspective." Journal of Economics, Business and Management, 4(2), 112-119.
15. Jain, B. A. & Kini, O. 1999, "The Life Cycle of Initial Public Offering Firms." Journal of Business Finance & Accounting, 26(9‐10), 1281-1307.
16. James, B. G. 1974, "The Theory of the Corporate Life Cycle." Long Range Planning, 7(2), 49-55.
17. Kallunki, J.-P. & Silvola, H. 2008, "The Effect of Organizational Life Cycle Stage on the Use of Activity-Based Costing." Management Accounting Research, 19(1), 62-79.
18. Kotler, P. 2009, "Marketing Management: A South Asian Perspective:" Pearson Education, India.
19. Lev, B. & Zarowin, P. (1999). "The Boundaries of Financial Reporting and How to Extend Them (Digest Summary)." Journal of Accounting Research, 37(2), 353-385.
20. Miller, D. & Friesen, P. H. 1983, "Successful and Unsuccessful Phases of the Corporate Life Cycle." Organization Studies, 4(4), 339-356.
21. Miller, D. & Friesen, P. H. 1984, "A longitudinal Study of the Corporate Life Cycle." Management Science, 30(10), 1161-1183.
22. Mueller, D. C. 1972, "A Life Cycle Theory of the Firm." The Journal of Industrial Economics, 199-219.
23. Myers, S. C. 1977, "Determinants of Corporate Borrowing." Journal of Financial Economics, 5(2), 147-175.
24. Richardson, P. R. & Gordon, J. R. 1980, "Measuring Total Manufacturing Performance." Sloan Manage. Rev.;(United States), 21(2).
25. Rink, D. R. & Swan, J. E. 1979, "Product Life Cycle Research: A Literature Review." Journal of Business Research, 7(3), 219-242.
26. Seifert, B. & Gonenc, H. 2012, "Issuing and Repurchasing: The Influence of Mispricing, Corporate Life Cycle and Financing Waves." Journal of Multinational Financial Management, 22(3), 66-81.
27. Spence, A. M. 1979, "Investment Strategy and Growth in a New Market." The Bell Journal of Economics, 1-19.
28. Won, J. & Ryu, S.-L. 2015, "Operational Efficiency and Firm Life Cycle in the Korean Manufacturing Sector." Paper Presented at the Current Research on Business VI. Proceedings of the 8th International Workshop, Jeju Island, Korea.
29. Yonpae, P. & Chen, K. 2006, "The Effect of Accounting Conservatism and Life-Cycle Stages on Firm Valuation." Journal of Applied Business Research, 22(3), 75.