What Is a Firm’s Life Expectancy? Empirical Evidence in the Context of Portuguese Companies

Reis Pedro Nogueira () and Augusto Mário Gomes ()
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Reis Pedro Nogueira: Grupo Visabeira SGPS SA – Finance, Palácio do Gelo Shoping 3° andar Viseu 3500-606, Viseu 3500–606, Portugal
Augusto Mário Gomes: School of Economics and Institute of Systems and Robotics – Finance, University of Coimbra, Viseu, Portugal

Journal of Business Valuation and Economic Loss Analysis, 2015, vol. 10, issue 1, 45-75

Abstract: It isa fact that the uncertainty about a firm’s future has to be measured and incorporated into a company’s valuation throughout the explicit analysis period – in the continuing or terminal value within valuation models. One of the concerns that can influence the continuing value of enterprises, which is not explicitly considered in traditional valuation models, is a firm’s average life expectancy. Although the literature has studied the life cycle of a firm, there is still a considerable lack of references on this topic. If we ignore the period during which a company has the ability to produce future cash flows, the valuations can fall into irreversible errors, leading to results markedly different from market values. This paper aims to provide a contribution in this area. Its main objective is to construct a mortality table for non-listed Portuguese enterprises, showing that the use of a terminal value through a mathematical expression of perpetuity of free cash flows is not adequate. We provide the use of an appropriate coefficient to perceive the number of years in which the company will continue to operate until its theoretical extinction. If well addressed regarding valuation models, this issue can be used to reduce or even to eliminate one of the main problems that cause distortions in contemporary enterprise valuation models: the premise of an enterprise’s unlimited existence in time. Besides studying the companies involved in it, from their existence to their demise, our study intends to push knowledge forward by providing a consistent life and mortality expectancy table for each age of the company, presenting models with an explicitly and different survival rate for each year. Moreover, we show that, after reaching a certain age, firms can reinvent their business, acquiring maturity and consequently postponing their mortality through an additional life period.

Keywords: valuation; life expectancy; mortality table; continuing value; cash-flow (search for similar items in EconPapers)
JEL-codes: G17 G32 G34 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1515/jbvela-2014-0003

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