Testing Corporate Life Cycle Theory: A Multinomial Logistic Regression Approach

Abstract

Purpose: This article tests the corporate life cycle theory in the context of an emerging market. Design/Methodology/Approach: We use 3179 non-financial Indian firms’ data for the period 2011-2020 to validate the claim. To access the robustness of empirical relationships, we employ multinomial logistic and probit regression models. Findings: The findings indicate that firms’ age follow a non-linear pattern over its life cycle. Firms at the birth and decline stages experienced lower profitability, higher investment opportunities and less likelihood for dividends. Growth firms experiences higher investment opportunities, therefore raising more funds from debt along with paying dividends for reputation building. Furthermore, mature firms with larger size and shrinking investment opportunities, generating cash flows due to higher profitability. Thus, they pay dividend and consider being less risky. For 5 years of out-of-sample data (2016-2020), our model predicts with an average accuracy of 65%. From the perspective of inter-stage transition, firms in the birth and decline stages have a tendency to improve their position, whereas firms in the mature stages are relatively stable in future period. Originality: It seems that very few studies have examined the issue of how the firm characteristics varies over its lifecycle in emerging markets and our research bridges this gap in the literature.