Limited Managerial Attention and Corporate Aging

64 Pages Posted: 6 Sep 2013 Last revised: 13 Nov 2013

Claudio F. Loderer

University of Berne - Institute for Financial Management; European Corporate Governance Institute (ECGI)

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Urs Waelchli

Rochester-Bern Executive Programs; University of Rochester - Simon Business School

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Date Written: September 1, 2013

Abstract

As firms have more assets in place, more of management’s limited attention is focused on managing assets in place rather than developing new growth options. Consequently, as firms grow older, they have fewer growth options and a lower ability to generate new growth options. This simple theory predicts that Tobin’s q falls with age. Further, competition in the product market is expected to slow down the decrease in Tobin’s q because it forces firms to look for alternative sources of rents. Similarly, greater competition in the labor market reduces the decrease in Tobin’s q with age because old firms are in a better position to hire employees that can help with innovation. In contrast, competition in the market for corporate control should accelerate the decline because it forces management to focus more on managing assets in place whose performance is more directly observable than on developing growth options where results may not be observable for some time. We find strong support for these predictions in tests using exogenous variation in competition.

Keywords: firm age, firm performance, corporate governance, firm life cycle, competition, credit constraints

JEL Classification: G30, L20

Suggested Citation

Loderer, Claudio F. and Stulz, René M. and Waelchli, Urs, Limited Managerial Attention and Corporate Aging (September 1, 2013). ECGI - Finance Working Paper No. 381; Fisher College of Business Working Paper No. 2013-03-13; Charles A. Dice Center Working Paper No. 2013-13; Swiss Finance Institute Research Paper No. 13-46. Available at SSRN: https://ssrn.com/abstract=2320758 or http://dx.doi.org/10.2139/ssrn.2320758

Claudio F. Loderer

University of Berne - Institute for Financial Management ( email )

Engehaldenstrasse 4
Bern, CH-3012
Switzerland
+41 31 631 37 75 (Phone)
+41 31 631 84 21 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Urs Waelchli

Rochester-Bern Executive Programs ( email )

Engehaldenstrasse 4
Bern, 3012
Switzerland

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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