Abstract
Profitability is an important performance measure and a related study based on the life cycle of firms is appreciated by researchers and managers. The impact of the financial crisis adds novelty to such research. This study discusses the impact of financial ratios on profitability of firms under the influence of financial crises. It is based on a sample of 42 Jordanian firms and uses panel data regression on an annual dataset for the time period 2000-2018. The study found mature stage firms to be explained best with the suggested model. The impact of current ratio on the profitability of all companies was observed as positive while the profitability is found to be negatively affected by debt for all life cycle stages except for the declining stage. Also, it is found that the declining stage firms need to rely on debt to stay profitable and sustain.
Highlights
Firm life cycle is a concept derived and similar to product life cycle, originally used in marketing and strategy and used in financial studies (Yan & Zhao,2010)
For each of the panel, descriptive analysis, Pooled Ordinary Least Squared (POLS) regression and fixed effect/random effect-based regression is applied for analysis
The effect of the financial crisis on profits was observed positive and equal for the industry and growth stage companies indicating that the growth stage companies were able to negotiate the effect of the financial crisis better than the other stage companies
Summary
Firm life cycle is a concept derived and similar to product life cycle, originally used in marketing and strategy and used in financial studies (Yan & Zhao,2010). Fairfield et al (2009) suggest that there is a lack of within-industry homogeneity in forecasting profitability This corollary further highlights the importance of a firm's life cycle is studied within an industry or across industries. The number of stages suggested by different researches for the life cycle models varies from three to ten stages and all such models highlight a consistent pattern of firm development (see Adizes, 1989; Smith et al, 1985). Panel 1: A panel OLS regression for all 42 sample companies indicated that fixed effects are more appropriate for this panel (Hausman test p-value=0.009). The fixed effect panel regression model (equation 3) was found significant (p-value=0.005, R-squared at 9.6%) along with the independent variables, RoNW and debt ratio significant at 1% confidence level.
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