Cash Flow Patterns as a Proxy for Firm Life Cycle

45 Pages Posted: 18 Sep 2008 Last revised: 16 Feb 2012

See all articles by Victoria Dickinson

Victoria Dickinson

University of Mississippi - Patterson School of Accountancy

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2008

Abstract

This paper examines the validity of cash flow patterns as a proxy for firm life cycle. Cash flow patterns provide a parsimonious, but robust, indicator of firm life cycle stage that is free from distributional assumptions inherent when using a univariate or composite measure. The proxy is used to analyze the explanatory power and time series effects of life cycle on profitability. Evidence reveals that explanatory power of future profitability is increased by over 35 percent with the inclusion of life cycle information, even after controlling for the level and change in current profitability and growth in assets. Additionally, profitability is nonconvergent (RNOA spread of seven percent after five years) when sorted on life cycle which has implications for forecasting growth rates and time horizons. Neither industry effects nor age (both common life cycle proxies) subsume the firm-specific effect of life cycle as measured by cash flow patterns.

Keywords: Profitability, Return on Assets, Life Cycle, Firm Strategy

JEL Classification: L21, L22, M41

Suggested Citation

Dickinson, Victoria, Cash Flow Patterns as a Proxy for Firm Life Cycle (May 1, 2008). Available at SSRN: https://ssrn.com/abstract=1268509 or http://dx.doi.org/10.2139/ssrn.1268509

Victoria Dickinson (Contact Author)

University of Mississippi - Patterson School of Accountancy ( email )

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University, MS 38677
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