Corporate Life Cycle and Managerial Ability

Abstract

Using Dickinson (2011) model of firms’ life cycle stages and Demerjian et al. (2012) measure of corporate managerial ability, this study investigates whether corporate managerial ability varies among firm life cycle stages. Evidence from large dataset of U.S. publicly listed firms, we find that compared to the shake-out stage of a firm’s life cycle, managerial ability is significantly positively associated with the growth and maturity stages, and significantly negatively associated with the introduction and decline stages of a firm’s life cycle. In particular, our result consistent with the predictions of both dynamic resource-based dependence and agency theory, that we observe a U-shaped pattern in managerial ability outcomes across the life cycle. Finally, our results are robust to alternative measures of firm life cycle stages, managerial ability, and endogeneity.