Product Life Cycles in Corporate Finance

Abstract

We develop a novel 10-K text-based model of product life cycles and examine firm investment policies. Conditioning on the life cycle substantially improves the power of Q to explain investment, and reveals a natural ordering of investments over the life cycle. While R&D and CAPX sensitivity are high early in the cycle, acquisitions arise as firms mature, and divestitures and product extension investments arise as firms decline. Q sensitivities that condition on the life cycle can vary by as much as 400% from traditional sensitivities. The life cycle framework further reveals an enriched relationship between competition, investment and corporate profits.

Keywords: product life cycles, corporate investment, mergers, acquisitions, divestitures, tobins Q, text analysis

JEL Classification: G30, G31, G34, L10, L21