Firm Rigidities and the Decline in Growth Opportunities

Claudio Loderer (), René Stulz () and Urs Waelchli ()
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Claudio Loderer: Swiss Finance Institute, 8006 Zurich, Switzerland; University of Bern, 3012 Bern, Switzerland; European Corporate Governance Institute, 1000 Brussels, Belgium; and University of Rochester, Rochester, New York 14627
René Stulz: Ohio State University, Columbus, Ohio 43210; European Corporate Governance Institute, 1000 Brussels, Belgium; and National Bureau of Economic Research, Cambridge, Massachusetts 02138
Urs Waelchli: Rochester-Bern Executive Programs, 3012 Bern, Switzerland; and University of Rochester, Rochester, New York 14627

Management Science, 2017, vol. 63, issue 9, 3000-3020

Abstract: As public firms exploit their growth opportunities following their initial public offering, their assets in place increase, and they organize themselves optimally to operate these assets efficiently, which requires a more formal and less flexible organization than to generate new growth opportunities. Our theory predicts that, as a result of these inflexibilities, firms fail to fully replace their growth opportunities, so that their Tobin’s q falls with age and they invest less as they grow older. With our theory, competition in the market for corporate control and capital markets monitoring increase the rate of decrease in Tobin’s q , while product and labor market competition slow it down. We find empirical support for these predictions. We also find evidence that the decline in q is related to firm rigidities.

Keywords: firm age; firm life cycle; firm rigidities; firm performance; corporate governance; competition (search for similar items in EconPapers)
Date: 2017
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