Reaching Economies of Scale to Be a Viable Ongoing Entity

Michael S. Long () and Isuru Devaka Wijeyaratne
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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

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2013, vol. 16, issue 03, 1-21

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.

Keywords: Economies of scale; going concern; D24; M21; M42 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1142/S021909151350015X

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