Firm Life Cycle Classification: Co-movement and Information Transfers

61 Pages Posted: 16 Aug 2019 Last revised: 22 Mar 2021

See all articles by Matthew R. Lyle

Matthew R. Lyle

Northwestern University - Kellogg School of Management

Patrick Vorst

Maastricht University School of Business and Economics

Teri Lombardi Yohn

Emory University Goizueta Business School

Date Written: January 25, 2021

Abstract

Most asset pricing models incorporate the notion that firms’ stock returns comove due to their similar sensitivities/exposures to common latent factors in the economy. In this study, we investigate the extent to which firms in the same life cycle stage experience greater co-movement in terms of fundamental performance and in terms of greater similarity in the sensitivities to common factors popular in empirical asset pricing models. We also investigate whether there is a transfer of information across firms in the same life cycle stage around earnings announcements and other events. We find significantly greater accounting comparability and co-movement in asset growth, sales growth, and stock returns for firms in the same life cycle stage than for other firms. We also find significantly greater similarity in the sensitivities to empirical proxies for common factors such as the market, size, and book-to-market portfolios, and to the VIX and interest rates for firms in the same life cycle stage. Finally, we find significant information transfers around earnings announcements and 10-K filings between announcing firms and non-announcing firms in the same life cycle stage. These findings are robust to matching and entropy balancing on firm characteristics and are incremental to industry membership. Overall, this study documents the usefulness of firm life cycle for grouping firms with similar earnings and returns generating processes.

Keywords: Life Cycle, Information Transfers, Spillovers, Asset Pricing

Suggested Citation

Lyle, Matthew R. and Vorst, Patrick and Yohn, Teri Lombardi, Firm Life Cycle Classification: Co-movement and Information Transfers (January 25, 2021). Kelley School of Business Research Paper No. 19-47, Available at SSRN: https://ssrn.com/abstract=3436737 or http://dx.doi.org/10.2139/ssrn.3436737

Matthew R. Lyle

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Patrick Vorst (Contact Author)

Maastricht University School of Business and Economics ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Teri Lombardi Yohn

Emory University Goizueta Business School ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

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