Jump to ContentJump to Main Navigation
Show Summary Details
More options …

The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Lambertini, Luisa / Nimark, Kristoffer / Wang, Pengfei

2 Issues per year

IMPACT FACTOR 2017: 0.378
5-year IMPACT FACTOR: 0.462

CiteScore 2017: 0.62

SCImago Journal Rank (SJR) 2017: 0.553
Source Normalized Impact per Paper (SNIP) 2017: 0.605

See all formats and pricing
More options …

Profitability and the lifecycle of firms

Missaka Warusawitharana
  • Corresponding author
  • Board of Governors of the Federal Reserve System, Division of Supervision and Regulation, Mail Stop 1814, 20th and C Street NW Washington, DC 20551, United States of America
  • Email
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
Published Online: 2018-06-08 | DOI: https://doi.org/10.1515/bejm-2017-0124


Using data on private and public firms, this study documents that profitability follows a hump shape over the lifecycle of a firm. Profitability rises with age for young firms, remains elevated, and then declines slowly for mature firms. A dynamic lifecycle model captures the observed age profile of profitability. Investment in product development generates profitability increases for young firms while wage pressures from more productive entrants lead to profitability declines for mature firms. The model generates the lifecycle behavior of financing and growth documented in the literature, even though it contains no financial frictions. It also implies greater sensitivity of financing and growth to age for young firms, a prediction supported by empirical tests. Taken together, these findings indicate that profitability dynamics influence the financing and growth of firms over the lifecycle.

Keywords: financial frictions; firm lifecycles; profitability; quality ladder

JEL Classification: D92; G31; E22; L20


  • Acharya, Viral V., Stewart C. Myers, and Raghuram Rajan. 2011. “The Internal Governance of Firms.” Journal of Finance 66: 689–720.CrossrefGoogle Scholar

  • Aghion, Philippe, Nick Bloom, Richard Blundell, Rachel Griffith, and Peter Howitt. 2005. “Competition and Innovation: An Inverted-U Relationship.” Quarterly Journal of Economics 120: 701–728.Google Scholar

  • Aghion, Philippe, Richard Blundell, Rachel Griffith, Peter Howitt, and Susanne Prantl. 2009. “The Effects of Entry on Incumbent Innovation and Productivity.” Review of Economics and Statistics 91: 20–32.CrossrefGoogle Scholar

  • Aghion, Philippe, and Peter Howitt. 1992. “A Model of Growth Through Creative Destruction.” Econometrica 60: 323–351.CrossrefGoogle Scholar

  • Albuquerque, Rui, and Hugo A. Hopenhayn. 2004. “Optimal Lending Contracts and Firm Dynamics.” Review of Economic Studies 71: 285–315.CrossrefGoogle Scholar

  • Angelini, Paolo, and Andrea Generale. 2008. “On the Evolution of Firm Size Distributions.” American Economic Review 98: 426–438.CrossrefGoogle Scholar

  • Bitler, Marianne P., Tobias J. Moskowitz, and Annette Vissing-Jorgensen. 2005. “Testing Agency Theory with Entrepreneur Effort and Wealth.” Journal of Finance 60: 539–576.CrossrefGoogle Scholar

  • Bloom, Nick, Stephen Bond, and John van Reenen. 2007. “Uncertainty and Investment Dynamics.” Review of Economic Studies 74: 391–415.CrossrefGoogle Scholar

  • Bolton, Patrick, Hui Chen, and Neng Wang. 2011. “A Unified Theory of Tobin’s Q, Corporate Investment, Financing, and Risk Management.” Journal of Finance 66: 1545–1578.CrossrefGoogle Scholar

  • Brav, Omer. 2009. “Access to Capital, Capital Structure, and the Funding of the Firm.” Journal of Finance 64: 263–308.CrossrefGoogle Scholar

  • Cabral, Luis M. B., and Jose Mata. 2003. “On the Evolution of the Firm Size Distribution: Facts and Theory.” American Economic Review 93: 1075–1090.CrossrefGoogle Scholar

  • Cagetti, Marco, and Mariacristina De Nardi. 2006. “Entrepreneurship, Frictions, and Wealth.” Journal of Political Economy 114: 835–870.CrossrefGoogle Scholar

  • Chen, Hui, Jianjun Miao, and Neng Wang. 2010. “Entrepreneurial Finance and Nondiversifiable Risk.” Review of Financial Studies 23: 4348–4388.CrossrefGoogle Scholar

  • Clementi, Gian Luca, Thomas F. Cooley, and Sonia Di Giannatale. 2010. “A Theory of Firm Decline.” Review of Economic Dynamics 13: 861–885.CrossrefGoogle Scholar

  • Clementi, Gian Luca, and Berardino Palazzo. 2016. “Entry, Exit, Firm Dynamics, and Aggregate Fluctuations.” American Economic Journal: Macroeconomics 8: 1–41.Google Scholar

  • Cooley, Thomas F., and Vincenzo Quadrini. 2001. “Financial Markets and Firm Dynamics.” American Economic Review 91: 1286–1310.CrossrefGoogle Scholar

  • Cooper, Russell W., and John Haltiwanger. 2006. “On the Nature of Capital Adjustment Costs.” Review of Economic Studies 73: 611–633.CrossrefGoogle Scholar

  • DeAngelo, Harry, Linda DeAngelo, and Rene M. Stulz. 2006. “Dividend Policy and the Earned/Contributed Capital Mix: A Test of the Lifecycle Theory.” Journal of Financial Economics 81: 293–315.Google Scholar

  • Denis, David J., and Valeriy Sibilkov. 2010. “Financial Constraints, Investment, and the Value of Cash Holdings.” Review of Financial Studies 23: 247–269.CrossrefGoogle Scholar

  • Dinopoulos, Elias, and Peter Thompson. 1998. “Schumpeterian Growth Without Scale Effects.” Journal of Economic Growth 3: 313–335.CrossrefGoogle Scholar

  • Dunne, Timothy, Mark J. Roberts, and Larry Samuelson. 1989. “The Growth and Failure of U.S. Manufacturing Sector.” Quarterly Journal of Economics 104: 671–698.CrossrefGoogle Scholar

  • Eberly, Janice, Sergio Rebelo, and Nicolas Vincent. 2008. “Investment and Value: A Neoclassical Benchmark.” NBER Working Paper #13866.Google Scholar

  • Ericson, Richard, and Ariel Pakes. 1995. “Markov-Perfect Industry Dynamics: A Framework for Empirical Work.” Review of Economic Studies 62: 53–82.CrossrefGoogle Scholar

  • Fazzari, Steven M., R. Glenn Hubbard, and Bruce C. Petersen. 1988. “Financing Constraints and Corporate Investment.” Brookings Papers on Economic Activity 1: 141–195.Google Scholar

  • Foster, Lucia, John Haltiwanger, and Chad Syverson. 2008. “Reallocation, Firm Turnover, and Efficiency: Selection on Productivity or Profitability?” American Economic Review 98: 394–425.CrossrefGoogle Scholar

  • Foster, Lucia, John Haltiwanger, and Chad Syverson. 2012. “The Slow Growth of New Plants: Learning About Demand?” NBER Working Paper #17853.Google Scholar

  • Gamba, Andrea, and Alexander J. Triantis. 2008. “The Value of Financial Flexibility.” Journal of Finance 63: 2263–2296.CrossrefGoogle Scholar

  • Gomes, João F. 2001. “Financing Investment.” American Economic Review 90: 1263–1285.Google Scholar

  • Grossman, Gene M., and Elhanan Helpman. 1991. “Quality Ladders and Product Cycles.” Quarterly Journal of Economics 106: 557–586.CrossrefGoogle Scholar

  • Haltiwanger, John C., Ron S. Jarmin, and Javier Miranda. 2013. “Who Creates Jobs? Small vs Large vs Young.” Review of Economics and Statistics 95: 347–361.CrossrefGoogle Scholar

  • Harford, Jarrad. 2005. “What Drives Merger Waves?” Journal of Financial Economics 77: 529–560.CrossrefGoogle Scholar

  • Hayashi, Fumio. 1982. “Tobin’s Marginal q and Average q: A Neoclassical Interpretation.” Econometrica 50: 213–224.CrossrefGoogle Scholar

  • Heckman, James J. 1979. “Sample Selection Bias as a Specification Error.” Econometrica 47: 153–161.CrossrefGoogle Scholar

  • Hennessy, Christopher A., and Toni M. Whited. 2005. “Debt Dynamics.” Journal of Finance 60: 1129–1165.CrossrefGoogle Scholar

  • Hopenhayn, Hugo A. 1992. “Entry, Exit, and Firm Dynamics in Long Run Equilibrium.” Econometrica 60: 1127–1150.CrossrefGoogle Scholar

  • Hsieh, Chang-Tai, and Peter J. Klenow. 2014. “The Lifecycle of Plants in India and Mexico.” Quarterly Journal of Economics 129: 1035–1084.CrossrefGoogle Scholar

  • Huynh, Kim P., and Robert J. Petrunia. 2010. “Age Effects, Leverage and Firm Growth.” Journal of Economic Dynamics and Control 34: 1003–1013.CrossrefGoogle Scholar

  • Huynh, Kim P., and Robert J. Petrunia. 2016. “Post-entry Struggle for Life and Pre-exit Shadow of Death from a Financial Perspective.” International Journal of the Economics of Business 23: 1-18.Google Scholar

  • Jovanovic, Boyan. 1982. “Selection and the Evolution of Industry.” Econometrica 50: 649–670.CrossrefGoogle Scholar

  • Jovanovic, Boyan, and Peter Rousseau. 2008. “Mergers as Reallocation.” Review of Economics and Statistics 90: 765–776.CrossrefGoogle Scholar

  • Klette, Tor Jacob, and Samuel Kortum. 2004. “Innovating Firms and Aggregate Innovation.” Journal of Political Economy 112: 986–1018.CrossrefGoogle Scholar

  • Kogan, Leonid, Dimitris Papanikolaou, and Noah Stoffman. 2017. “Winners and Losers: Creative Destruction and the Stock Market.” NBER Working Paper # 18671.Google Scholar

  • Lee, Yoonsoo, and Toshihiko Mukoyama. 2015. “Entry and Exit of Manufacturing Plants over the Business Cycle.” European Economic Review 77: 20–27.CrossrefGoogle Scholar

  • Lentz, Rasmus, and Dale T. Mortensen. 2008. “An Empirical Model of Growth Through Innovation.” Econometrica 76: 1317–1373.CrossrefGoogle Scholar

  • Loderer, Claudio, Rene Stulz, and Urs Waelchi. 2017. “Firm Rigidities and the Decline in Growth Opportunities.” Management Science 63: 3000–3020.CrossrefGoogle Scholar

  • Lucas, Robert E., Jr. 1978. “On the Size Distribution of Business Firms.” Bell Journal of Economics 9: 508–523.CrossrefGoogle Scholar

  • Luttmer, Erzo G. J. 2011. “On the Mechanics of Firm Growth.” Review of Economic Studies 78: 1042–1068.CrossrefGoogle Scholar

  • Miao, Jianjun. 2005. “Optimal Capital Structure and Industry Dynamics.” Journal of Finance 60: 2621–2660.CrossrefGoogle Scholar

  • Moskowitz, Tobias J., and Annette Vissing-Jorgensen. 2002. “The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?” American Economic Review 92: 745–778.CrossrefGoogle Scholar

  • Moyen, Nathalie. 2004. “Investment-Cash Flow Sensitivities: Constrained Versus Unconstrained Firms.” Journal of Finance 59: 2061–2092.CrossrefGoogle Scholar

  • Rajan, Raghuram G., and Luigi Zingales. 1998. “Financial Dependence and Growth.” American Economic Review 88: 559–586.Google Scholar

  • Solow, Robert M., James Tobin, Carl C. von Weizsäcker, and Menahem E. Yaari. 1966. “Neoclassical Growth with Fixed Factor Proportions.” Review of Economic Studies 33: 79–115.CrossrefGoogle Scholar

  • Warusawitharana, Missaka. 2008. “Corporate Asset Purchases and Sales: Theory and Evidence.” Journal of Financial Economics 87: 471–497.CrossrefGoogle Scholar

  • Warusawitharana, Missaka. 2015. “Research and Development, Profits and Firm Value: A Structural Estimation.” Quantitative Economics 6: 531–565.CrossrefGoogle Scholar

  • Whited, Toni M. 2006. “External Finance Constraints and the Intertemporal Pattern of Intermittent Investment.” Journal of Financial Economics 81: 467–502.CrossrefGoogle Scholar

About the article

Published Online: 2018-06-08

Citation Information: The B.E. Journal of Macroeconomics, Volume 18, Issue 2, 20170124, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/bejm-2017-0124.

Export Citation

©2018 Walter de Gruyter GmbH, Berlin/Boston.Get Permission

Comments (0)

Please log in or register to comment.
Log in