The lifecycle of the firm, corporate governance and investment performance

Jimmy Saravia ()

No 10927, Documentos de Trabajo de Valor Público from Universidad EAFIT

Abstract: According to firm lifecycle theory the agency costs of free cash flows are not transitory problems, but are a recurrent issue once firms reach a certain stage in their lifecycle. In particular, as firms mature their cash flows increase substantially while their investment opportunities decline and, to prevent retrenchment, managements need to invest in negative net present value projects. However, too much overinvestment leads to low firm valuation and potentially a hostile takeover. This paper extends firm lifecycle theory by arguing that to neutralize the threat of takeover, managements of maturing firms and their boards of directors progressively deploy antitakeover provisions which allow them to overinvest safely and prevent a decline in the size of their corporations. Firm lifecycle theory is also tested empirically. In this respect, a contribution of this paper is to develop a new empirical index that permits the identification of mature corporations with governance problems due to agency costs of free cash flows. The empirical results show that as firms mature agency costs of free cash flows increase, more antitakeover provisions are put into place and firms invest in projects with returns below their cost of capital.

Keywords: Firm Life Cycle; Free Cash flows; Corporate Governance; Overinvestment (search for similar items in EconPapers)
JEL-codes: G31 G34 (search for similar items in EconPapers)
Pages: 40
Date: 2013-11-11
New Economics Papers: this item is included in nep-bec and nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://repository.eafit.edu.co/bitstream/handle/10 ... quence=1&isAllowed=y
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to repository.eafit.edu.cobitstream:443 (No such host is known. ) (http://repository.eafit.edu.co/bitstream/handle/10784/1258/2013_30_Jimmy_Saravia.pdf?sequence=1&isAllowed=y [302 Found]--> https://repository.eafit.edu.cobitstream/handle/10784/1258/2013_30_Jimmy_Saravia.pdf?sequence=1&isAllowed=y)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:col:000122:010927

Access Statistics for this paper

More papers in Documentos de Trabajo de Valor Público from Universidad EAFIT Contact information at EDIRC.
Bibliographic data for series maintained by Valor Público EAFIT - Centro de estudios e incidencia ().