The impact of the stage of the company's life cycle on the cost of equity through the coefficient β

Abstract

The valuation of the company's equity is one of the main tasks in the framework of the valuation of the company, as well as one of the main sections of corporate finance. The most used method of assessing the return on equity is the CAPM model, but this article analyzes the four-factor Fama-French model- Karcher due to its novelty and, as a consequence, fewer studies. The author analyzes the impact of the company's life cycle on the return on equity using an econometric analysis of 5 clusters of 3,113 public American companies (data for 1989-2019) classified according to the criterion of the stage of the life cycle. The relevance of the study lies in the absence of an unambiguous answer, confirming or refuting the existence of a link between the cost of equity and the stage of the life cycle. The classification is based on an article by Victoria Dickinson, Professor at the University of Mississippi, "Cash flows as an indicator of the stage of the company's life cycle." According to the results, the stage of the life cycle affects the cost of own capital, β the coefficient decreases during the first three stages (formation, growth, maturity), then continues to grow (shake-up, recession). The minimum value falls on the maturity stage, it can be assumed that this stage of the life cycle is the most reliable for stakeholders. This article can be useful to all persons evaluating business (investors, appraisers, etc.), as well as for the further development of this theoretical aspect.