Life cycle stage as determinant of operational efficiency with implications for benchmarking

Abstract

ABSTRACT We investigate the link between a firm’s life cycle and its operational efficiency and find that operational efficiency first increases and then decreases with the life cycle thus exhibiting an inverted – U shaped relationship. Our empirical examination reveals the relationship holds for subsamples of dividend- and non-dividend-paying firms, with dividend-paying firms displaying higher efficiency scores than their non-dividend-paying counterparts in each life cycle stage. In the literature on benchmarking the moderating role of a firm’s life cycle stage has not been considered. Thus, our findings have empirical significance for efficiency comparison in benchmarking studies. Including the life cycle stage of comparable firms permits a more homogeneous cohort for efficiency comparisons. Consequently, firm policy revolving around capital structure and dividend pay-outs need to take into cognizance that operational inefficiencies could also be a life stage phenomenon rather than agency issues led misallocation of resources. Additionally, we find that when operating efficiency is the variable being studied in a multivariate setting, controlling for the dividend status of a firm reduces omitted variable bias as dividend pay-outs and firm lifecycle are known to be intertwined.