Product Life Cycles in Corporate Finance
82 Pages Posted: 1 Jun 2018 Last revised: 12 Feb 2021
Date Written: February 11, 2021
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. Resulting Q sensitivities are remarkably heterogeneous over the cycle, and are even negative in some cases. These life cycle effects are economically larger than those attributable to competition, and are stronger in recent years.
Keywords: product life cycles, corporate investment, mergers, acquisitions, divestitures, tobins Q, text analysis
JEL Classification: E22, G31, G34, M41
Suggested Citation: Suggested Citation