Skip to content
Licensed Unlicensed Requires Authentication Published by De Gruyter December 24, 2014

What Is a Firm’s Life Expectancy? Empirical Evidence in the Context of Portuguese Companies

  • Pedro Nogueira Reis EMAIL logo and Mário Gomes Augusto ORCID logo

Abstract

It isa fact that the uncertainty about a firm’s future has to be measured and incorporated into a company’s valuation throughout the explicit analysis period – in the continuing or terminal value within valuation models. One of the concerns that can influence the continuing value of enterprises, which is not explicitly considered in traditional valuation models, is a firm’s average life expectancy. Although the literature has studied the life cycle of a firm, there is still a considerable lack of references on this topic. If we ignore the period during which a company has the ability to produce future cash flows, the valuations can fall into irreversible errors, leading to results markedly different from market values. This paper aims to provide a contribution in this area. Its main objective is to construct a mortality table for non-listed Portuguese enterprises, showing that the use of a terminal value through a mathematical expression of perpetuity of free cash flows is not adequate. We provide the use of an appropriate coefficient to perceive the number of years in which the company will continue to operate until its theoretical extinction. If well addressed regarding valuation models, this issue can be used to reduce or even to eliminate one of the main problems that cause distortions in contemporary enterprise valuation models: the premise of an enterprise’s unlimited existence in time. Besides studying the companies involved in it, from their existence to their demise, our study intends to push knowledge forward by providing a consistent life and mortality expectancy table for each age of the company, presenting models with an explicitly and different survival rate for each year. Moreover, we show that, after reaching a certain age, firms can reinvent their business, acquiring maturity and consequently postponing their mortality through an additional life period.

JEL Classifications: G17; G32; G34

Appendix

Table 5

List of deaths by date of establishment after 1960, and dissolution since 1990

Dissolution date19901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012Total
Incorporation date
1960248346810859101418141718525511192297
196111136883116316971215161059559164279
196222346469461251114171513513913171254
19632232813511571191121121811434312137269
1964212103681610810101816142118556517214335
19651422410101212171013151715142912697517274391
1966224211141019131511152416132618787015244406
1967437713171091572120314824413111198265614613
1968148116151628292825384031181951058217924885136291420
19691453510816121012161523303827211159026565548
197021456491727141523183024362827989557313574
19712951312161219303110152835363730321248671294686
197212481114201121161925373537394023134124814510757
197315391523112137242626293554634329186156965711960
19743184821101735181836344943514938178134105448912
19751261112917244419183023544455625018817613045181038
197623516161934275436353840595883796827119713672161364
197717616213333367052516566678811511710036136916989131945
19782261330213640694943586378861101128734038298111251861
19794213152427254851523157719097101100733764389593181901
19802692027232756695043616193971341118841645911892182080
198131211322857346680666780101136139158156105486584181150292761
19826612221853446394626581103130129147155120463644129160282734
198317613273430376037376163661161091186341044677109181945
1984362330323948897652727712410312912010046746999110262294
19853314272445595810778739093171132180163103584631118149382943
19867615325564707614110573141134195217239238164760879174218584061
19872614335111285101179104102141147250245317290201806823179248454481
1988571544559310012020415713517520928429435836225710271101187317615567
19893115427711213115227517514421524433434941447726110551250238345576366
1990113387613314412015530021319022427137239550350331414431449260430667613
19915366910714216616930722616924626433738247547833114961087301397627252
199287314616116620037427023131031645944760959342718931287335466898860
19932211615018424138230629032936853954865366348620451490350541799782
19942612015718136228224331337950258064667245620251301349620979311
1995481401984033022803143966046167287185442056157639868411410119
1996391693723453013894496726767907835652099183341681811010826
1997352743003454124407367348938376512024163853189615110897
1998622603444725938309091063105874422721731546116917812231
19994920337647688091597010207579451559646156723110594
2000473454128701108116611899259341574740195725111518
2001574231280217818781899142214171656973277246916424
2002113738140514781616127712821078813227133112402
200315970011911291965101786959012662588306
20041887991290990100510017299782737253
2005212918114011309987799033016381
2006374111515491339103810183836816
200741613741629116011914516221
20085781376150814624485372
2009488123714844913700
201057513465612482
20117685251293
20128181
Global Total631292896841124166519002491471038903798543466891148014540171851906715748381263724017043279036578237776

References

Agarwal, R. 1997. “Survival of Firms over the Product Life Cycle.” Southern Economic Journal63(3):5718410.2307/1061095Search in Google Scholar

Agarwal, R., and D.Audretsch. 2001. Does Entry Size Matter? The Impact of the Life Cycle and Technology on Firm Survival. Journal of Industrial Economics49(1):2143.10.1111/1467-6451.00136Search in Google Scholar

Anavatan, A., and M.Karaoz. 2013. “Cox Regression Models with Time-Varying Covariates Applied to Survival Success of Young Firms.” Journal of Economic and Social Studies3(2):536810.14706/JECOSS11324Search in Google Scholar

Audretsch, D. 1991. “New Firm Survival and the Technological Regime.” Review of Economics and Statistics73(3):44150.10.2307/2109568Search in Google Scholar

Audretsch, D. B., and T.Mahmood. 1995. “New-Firm Survival: New Results Using a Hazard Function.” Review of Economics and Statistics77(1):97103.10.2307/2109995Search in Google Scholar

Audretsch, D. B., E.Santarelli, and M.Vivarelli. 1999. “Startup Size and Industrial Dynamics: Some Evidence from Italian Manufacturing.” International Journal of Industrial Organization17(7): 96583.10.1016/S0167-7187(98)00002-2Search in Google Scholar

Bancel, F., and U. R.Mittoo. 2014. “The Gap between Theory and Practice of Firm Valuation: Survey of European Valuation Experts.” Social Science Research Network. Accessed April 5, 2014. http://ssrn.com/abstract=242038010.2139/ssrn.2420380Search in Google Scholar

Berkman, H., M. E.Bradbury, and J.Ferguson. 1998. “The Magic of Earnings in Terminal Value Calculations.” Journal of Financial Statement Analysis3(4):2733.Search in Google Scholar

Bhattacharya, U., and A.Borisov.2011. “Firm Mortality and Natal Financial Care”. Social Science Research Network Working papers series.10.2139/ssrn.1649732Search in Google Scholar

Black, E. L.1998. “Life-Cycle Impacts on the Incremental Value Relevance of Earnings and Cash Flow Measures”. The Journal of Financial Statement Analysis4:4056.Search in Google Scholar

Brass, W.1971. “On the Scale of Mortality.” In Biological Aspects of Demography, edited by Brass, William, 69–110. London: Taylor and Francis.Search in Google Scholar

Bravo, J. M.2007. “Tábuas de Mortalidade Contemporâneas e Prospectivas: Modelos Estocásticos, Aplicações Actuariais e Cobertura do Risco de Longevidade”. Phd thesis in Economics, University of Évora, Portugal.Search in Google Scholar

Buus, T.2007. “Terminal Value Parameters: A Short Note.” European Financial and Accounting Journal2(2):4454.Search in Google Scholar

Cao, Yu.2012. “MCELCCh-FDP: Financial Distress Prediction with Classifier Ensembles Based on Firm Life Cycle and Choquet Integral.” Expert Systems with Applications39:70419.10.1016/j.eswa.2012.01.043Search in Google Scholar

Carrilho, M. J., and L.Patrício. 2004. “Tábuas de mortalidade em Portugal.” Revista de Estudos Demográficos36:4170. INE.Search in Google Scholar

Cassia, L., A.Plati, and S.Vismara. 2007. “Equity Valuation Using DCF: A Theoretical Analysis of the Long Term Hypotheses.” Investment Management and Financial Innovations4(1):91108.Search in Google Scholar

Caves, R. E.1998. “Industrial Organization and New Findings on the Turnover and Mobility of Firms.” Journal of Economic Literature36(December):194782Search in Google Scholar

Chen, J.1995. “Discuss About the Relationship between Enterprise Life Cycle and Decayed”. China Industrial Economy12:513.Search in Google Scholar

Chen, X., C. A. O.Yu, and F.Wang. 2010. “A Life Cycle Analysis of Hunan’s Enterprises and Their Determinants.” China Economic Review21(3):4704810.1016/j.chieco.2010.04.006Search in Google Scholar

Chiang, S., P.Lee, and A.Anandarajan. 2013. “Corporate Governance and Innovative Success: An Examination of the Moderating Influence of a Firm’s Life Cycle Stage Management.” Policy and Practice15(4):50014.10.5172/impp.2013.15.4.500Search in Google Scholar

Copeland, T., T.Koller, and J.Murrin. 2000. Valuation: Measuring and Managing the Value of Companies, 3rd ed. Nova Iorque: John Wiley and Sons.Search in Google Scholar

Cox, D.1972. “Regression Models and Life-Tables.” Journal of the Royal Statistical Society34(2):18722010.1111/j.2517-6161.1972.tb00899.xSearch in Google Scholar

Damodaran, A.2002. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. New Jersey: Wiley.Search in Google Scholar

DeAngelo, H., L.DeAngelo, and R. M.Stulz. 2006. Dividend Policy and the Earned/Contributed Capital Mix: A Test of the Life-Cycle Theory. Journal of Financial Economics81(2):22754.10.1016/j.jfineco.2005.07.005Search in Google Scholar

Dominiak, P., and M.Mazurkiewicz. 2011. “Analysis of the Risk of Company’s Bankruptcy in Polish Food and Beverage Production Sector Using the Cox Regression.” Operations Research and Decisions21(1):1931Search in Google Scholar

Dunne, T., M.Roberts, and L.Samuelson. 1989. “The Growth and Failure of U.S. Manufacturing Plants.” Quarterly Journal of Economics104(4):67198.10.2307/2937862Search in Google Scholar

Fernandez, P.2005. “Equivalence of Ten Different Methods for Valuing Companies by Cash Flow Discounting.” International Journal of Finance Education1(1):14168.Search in Google Scholar

Forfar, D., J.McCutheon, and A.Wilkie. 1988. “On Graduation by Mathematical Formula.” Journal of the Institute of Actuaries115(1):114910.1017/S0020268100042633Search in Google Scholar

Gardner, J. W.1965. How to Prevent Organizational Dry Rot. Harper’s Magazine.Search in Google Scholar

Gordon, M. J.1959. “Dividends, Earnings and Stock Prices.” Review of Economics and Statistics41(2):99105.10.2307/1927792Search in Google Scholar

Haire, M.1959. Biological Models and Empirical Histories in the Growth of Organizations: Model Organization Theory. New York, NY: John Wiley.Search in Google Scholar

Heligman, L., and J. H.Pollard. 1980. “The Age Pattern of Mortality”. Journal of the Institute of Actuaries107:4980.10.1017/S0020268100040257Search in Google Scholar

Honjo, Y.2000. “Business Failure of New Firms: An Empirical Analysis Using a Multiplicative Hazard Model.” International Journal of Industrial Organization18(4):557574.10.1016/S0167-7187(98)00035-6Search in Google Scholar

Ikromov, N., and A.Yavas. 2012. “Cash Flow Volatility, Prices and Price Volatility: An Experimental Study.” Journal of Real Estate Finance and Economics44(1):2032910.1007/s11146-011-9320-5Search in Google Scholar

Jenkins, D. S., G. D.Kane, and U.Velury. 2004. “The Impact of the Corporate Life-Cycle on the Value-Relevance of Disaggregated Earnings Component”. Review of Accounting and Finance3:520.10.1108/eb043411Search in Google Scholar

Jennergren, L. P.2008. “Continuing Value in Firm Valuation by the Discounted Cash Flow Model.” European Journal of Operational Research185(3):154863.10.1016/j.ejor.2006.08.012Search in Google Scholar

Jennergren, L. P.2010. “On the Forecasting of Net Property, Plant and Equipment, and Depreciation in Firm Valuation by the Discounted Cash Flow Model.” Journal of Business Valuation and Economic Loss Analysis5(1):128.10.2202/1932-9156.1096Search in Google Scholar

Jennergren, L. P.2013. “Firm Valuation with Bankruptcy Risk.” Journal of Business Valuation and Economic Loss Analysis8(1):91131.10.1515/jbvela-2013-0009Search in Google Scholar

Jones, N.2009. “SME’s Lifecycle – Steps to Failure and Success.” AU-GSB e-Journal2:114.Search in Google Scholar

Jovanovic, B.1982. “Selection and Evolution of Industry.” Econometrica50:337.10.2307/1912606Search in Google Scholar

Koller, T., M.Goedhart, and D.Wessels. 2010. Valuation: Measuring and Managing the Value of Companies, 5th ed. New York, NY: John Wiley and Sons.Search in Google Scholar

Levin, J., and P.Olsson. 2000. “Terminal Value Techniques in Equity Valuation—Implications of the Steady State Assumption.” Research Report, Stockholm School of Economics, The Economic Research Institute.Search in Google Scholar

Lin, S. -J., C.Chang, and M. -F.Hsu. 2013. “Multiple Extreme Learning Machines for a Two-Class Imbalance Corporate Life Cycle Prediction”. Knowledge-Based Systems39:21423.10.1016/j.knosys.2012.11.003Search in Google Scholar

Madden, B. J.2005. Maximizing Shareholder Value and the Greater Good. Naperville, IL: Learning WhatWorks, Inc.Search in Google Scholar

Mahmood, T.2000. “Survival of Newly Founded Businesses: A Log-Logistic Model Approach.” Small Business Economics14(3):22337.10.1023/A:1008116207175Search in Google Scholar

Martins, A.2011. “The Valuation of Privately Held Firms and Litigation: A Case Study.” International Journal of Law and Management53(3):20720.10.1108/17542431111133436Search in Google Scholar

Mata, J., and P.Portugal. 1994. “Life Duration of New Firms.” Journal of Industrial Economics42(3): 22746.10.2307/2950567Search in Google Scholar

Morris, J. R.2009. “Life and Death of Businesses: A Review of Research on Firm Mortality.” Journal of Business Valuation and Economic Loss Analysis4(1):139.10.2202/1932-9156.1050Search in Google Scholar

Owen, S., and A.Yawson. 2010. “Corporate Life Cycle and M and A Activity.” Journal of Banking and Finance34(2):42740.10.1016/j.jbankfin.2009.08.003Search in Google Scholar

Petersen, C., and T.Plenborg. 2009. “The Implementation and Application of Firm Valuation Models.” The Journal of Applied Business Research25(1):112.Search in Google Scholar

Queen, M., and R.Roll. 1987. “Firm Mortality: Using Market Indicators to Predict Survival.” Financial Analysts Journal43(3):926.10.2469/faj.v43.n3.9Search in Google Scholar

Reis, P., and M.Augusto. 2013. “The Terminal Value Performing in Firm Valuation: The Gap of Literature and Research Agenda.” Journal of Modern Accounting and Auditing9(12):162236.Search in Google Scholar

Rink, D. R., and J. E.Swan. 1979. “Product Life Cycle Research: A Literature Review.” Journal of Business Research7(3):21942.10.1016/0148-2963(79)90030-4Search in Google Scholar

Ross, S., R.Westerfeld, and J.Jaffe. 2007. Modern financial management, 8th ed. McGrawhill: London.Search in Google Scholar

Sakai, K., I.Uesugi, and T.Watanabe. 2010. “Firm Age and the Evolution of Borrowing Costs: Evidence from Japanese Small Firms.” Journal of Banking and Finance34(8):19708110.1016/j.jbankfin.2010.01.001Search in Google Scholar

Shaked, I., and S.Kempainen. 2009. “A Review of Fairness Opinions and Proxy Statements: 2005–2006.” Journal of Applied Finance19(1–2):10328.Search in Google Scholar

Stamm, I., and C.Lubinski. 2011. “Crossroads of Family Business Research and Firm Demography—A Critical Assessment of Family Business Survival Rates.” Journal of Family Business Strategy2:11727.10.1016/j.jfbs.2011.07.002Search in Google Scholar

Strotmann, H.2007. “Entrepreneurial Survival.” Small Business Economics28(1):87104.10.1007/s11187-005-8859-zSearch in Google Scholar

Sutton, J.1997. “Gibrat’s Legacy.” Journal of Economic Literature35(1):4059Search in Google Scholar

Thomas, R., and B. E.Gup. 2010. The Valuation Handbook: Valuation Techniques from Today’s Top Practitioners. New Jersey: Wiley Finance.10.1002/9781118268179Search in Google Scholar

Tuller, L. W.2008. The Small Business Valuation Book, 2nd ed. Avon, MA 02322. U.S.A.: Adams.Search in Google Scholar

Wagner, J.1994. “The Post-Entry Performance of New Small Firms in Manufacturing Industries.” Journal of Industrial Economics42(2):14154.10.2307/2950486Search in Google Scholar

Published Online: 2014-12-24
Published in Print: 2015-1-1

©2015 by De Gruyter

Downloaded on 4.3.2024 from https://www.degruyter.com/document/doi/10.1515/jbvela-2014-0003/pdf
Scroll to top button