Firm Life Cycle Classification: Co-movement and Information Transfers

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