Cash Flow Patterns as a Proxy for Firm Life Cycle
The Accounting Review, Forthcoming
45 Pages Posted: 15 Jul 2005 Last revised: 16 Feb 2012
There are 2 versions of this paper
Cash Flow Patterns as a Proxy for Firm Life Cycle
Cash Flow Patterns as a Proxy for Firm Life Cycle
Date Written: April 19, 2011
Abstract
This study develops a firm life cycle proxy using cash flow patterns. The patterns provide a parsimonious indicator of life cycle stage that is free from distributional assumptions (i.e., uniformity). The proxy identifies differential behavior in the persistence and convergence patterns of profitability. For example, return on net operating assets (RNOA) does not mean-revert (spread of seven percent after five years between mature and decline firms) when examined by life cycle stage, which has implications for growth rates and forecast horizons. Further, determinants of future profitability such as asset turnover and profit margin are differentially successful in generating increases in profitability conditional on life cycle stage. Finally, investors do not fully incorporate the information contained in cash flow patterns and as a result, undervalue mature firms. The cash flow proxy is a robust tool that has applications in analysis, forecasting, valuation, and as a control variable for future research.
Keywords: life cycle, financial statement analysis, return on net operating assets, DuPont analysis, forecasting
JEL Classification: L25
Suggested Citation: Suggested Citation
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