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

Journal of Business Valuation and Economic Loss Analysis

Editor-in-Chief: Ewing, Bradley T. / Hoffman, Jim

1 Issue per year


CiteScore 2016: 0.32

SCImago Journal Rank (SJR) 2016: 0.143
Source Normalized Impact per Paper (SNIP) 2016: 0.623

Online
ISSN
1932-9156
See all formats and pricing
More options …

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

Pedro Nogueira Reis
  • Corresponding author
  • Grupo Visabeira SGPS SA – Finance, Palácio do Gelo Shoping 3° andar Viseu 3500-606, Viseu 3500–606, Portugal
  • Email
  • Other articles by this author:
  • De Gruyter OnlineGoogle Scholar
/ Mário Gomes AugustoORCID iD: http://orcid.org/0000-0001-7345-1679
Published Online: 2014-12-24 | DOI: https://doi.org/10.1515/jbvela-2014-0003

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.

Keywords: valuation; life expectancy; mortality table; continuing value; cash-flow

JEL Classifications: G17; G32; G34

References

  • Agarwal, R. 1997. “Survival of Firms over the Product Life Cycle.” Southern Economic Journal 63(3):571–84CrossrefGoogle 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 Economics 49(1):21–43.CrossrefGoogle 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 Studies 3(2):53–68CrossrefGoogle Scholar

  • Audretsch, D. 1991. “New Firm Survival and the Technological Regime.” Review of Economics and Statistics 73(3):441–50.CrossrefGoogle Scholar

  • Audretsch, D. B., and T. Mahmood. 1995. “New-Firm Survival: New Results Using a Hazard Function.” Review of Economics and Statistics 77(1):97–103.CrossrefGoogle Scholar

  • Audretsch, D. B., E. Santarelli, and M. Vivarelli. 1999. “Startup Size and Industrial Dynamics: Some Evidence from Italian Manufacturing.” International Journal of Industrial Organization 17(7): 965–83.CrossrefGoogle 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=2420380

  • Berkman, H., M. E. Bradbury, and J. Ferguson. 1998. “The Magic of Earnings in Terminal Value Calculations.” Journal of Financial Statement Analysis 3(4):27–33.Google Scholar

  • Bhattacharya, U., and A. Borisov. 2011. “Firm Mortality and Natal Financial Care”. Social Science Research Network Working papers series.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 Analysis 4:40–56.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.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.Google Scholar

  • Buus, T. 2007. “Terminal Value Parameters: A Short Note.” European Financial and Accounting Journal 2(2):44–54.Google Scholar

  • Cao, Yu. 2012. “MCELCCh-FDP: Financial Distress Prediction with Classifier Ensembles Based on Firm Life Cycle and Choquet Integral.” Expert Systems with Applications 39:7041–9.CrossrefGoogle Scholar

  • Carrilho, M. J., and L. Patrício. 2004. “Tábuas de mortalidade em Portugal.” Revista de Estudos Demográficos 36:41–70. INE.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 Innovations 4(1):91–108.Google Scholar

  • Caves, R. E. 1998. “Industrial Organization and New Findings on the Turnover and Mobility of Firms.” Journal of Economic Literature 36(December):1947–82Google Scholar

  • Chen, J. 1995. “Discuss About the Relationship between Enterprise Life Cycle and Decayed”. China Industrial Economy 12:5–13.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 Review 21(3):470–48CrossrefGoogle 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 Practice 15(4):500–14.CrossrefGoogle 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.Google Scholar

  • Cox, D. 1972. “Regression Models and Life-Tables.” Journal of the Royal Statistical Society 34(2):187–220Google Scholar

  • Damodaran, A. 2002. Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. New Jersey: Wiley.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 Economics 81(2):227–54.CrossrefGoogle 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 Decisions 21(1):19–31Google Scholar

  • Dunne, T., M. Roberts, and L. Samuelson. 1989. “The Growth and Failure of U.S. Manufacturing Plants.” Quarterly Journal of Economics 104(4):671–98.CrossrefGoogle Scholar

  • Fernandez, P. 2005. “Equivalence of Ten Different Methods for Valuing Companies by Cash Flow Discounting.” International Journal of Finance Education 1(1):141–68.Google Scholar

  • Forfar, D., J. McCutheon, and A. Wilkie. 1988. “On Graduation by Mathematical Formula.” Journal of the Institute of Actuaries 115(1):1–149CrossrefGoogle Scholar

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

  • Gordon, M. J. 1959. “Dividends, Earnings and Stock Prices.” Review of Economics and Statistics 41(2):99–105.CrossrefGoogle Scholar

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

  • Heligman, L., and J. H. Pollard. 1980. “The Age Pattern of Mortality”. Journal of the Institute of Actuaries 107:49–80.CrossrefGoogle Scholar

  • Honjo, Y. 2000. “Business Failure of New Firms: An Empirical Analysis Using a Multiplicative Hazard Model.” International Journal of Industrial Organization 18(4):557–574.CrossrefGoogle Scholar

  • Ikromov, N., and A. Yavas. 2012. “Cash Flow Volatility, Prices and Price Volatility: An Experimental Study.” Journal of Real Estate Finance and Economics 44(1):203–29CrossrefGoogle 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 Finance 3:5–20.CrossrefGoogle Scholar

  • Jennergren, L. P. 2008. “Continuing Value in Firm Valuation by the Discounted Cash Flow Model.” European Journal of Operational Research 185(3):1548–63.CrossrefGoogle 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 Analysis 5(1):1–28.CrossrefGoogle Scholar

  • Jennergren, L. P. 2013. “Firm Valuation with Bankruptcy Risk.” Journal of Business Valuation and Economic Loss Analysis 8(1):91–131.CrossrefGoogle Scholar

  • Jones, N. 2009. “SME’s Lifecycle – Steps to Failure and Success.” AU-GSB e-Journal 2:1–14.Google Scholar

  • Jovanovic, B. 1982. “Selection and Evolution of Industry.” Econometrica 50:3–37.CrossrefGoogle 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.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.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 Systems 39:214–23.CrossrefGoogle Scholar

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

  • Mahmood, T. 2000. “Survival of Newly Founded Businesses: A Log-Logistic Model Approach.” Small Business Economics 14(3):223–37.CrossrefGoogle Scholar

  • Martins, A. 2011. “The Valuation of Privately Held Firms and Litigation: A Case Study.” International Journal of Law and Management 53(3):207–20.CrossrefGoogle Scholar

  • Mata, J., and P. Portugal. 1994. “Life Duration of New Firms.” Journal of Industrial Economics 42(3): 227–46.CrossrefGoogle Scholar

  • Morris, J. R. 2009. “Life and Death of Businesses: A Review of Research on Firm Mortality.” Journal of Business Valuation and Economic Loss Analysis 4(1):1–39.CrossrefGoogle Scholar

  • Owen, S., and A. Yawson. 2010. “Corporate Life Cycle and M and A Activity.” Journal of Banking and Finance 34(2):427–40.CrossrefGoogle Scholar

  • Petersen, C., and T. Plenborg. 2009. “The Implementation and Application of Firm Valuation Models.” The Journal of Applied Business Research 25(1):1–12.Google Scholar

  • Queen, M., and R. Roll. 1987. “Firm Mortality: Using Market Indicators to Predict Survival.” Financial Analysts Journal 43(3):9–26.CrossrefGoogle 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 Auditing 9(12):1622–36.Google Scholar

  • Rink, D. R., and J. E. Swan. 1979. “Product Life Cycle Research: A Literature Review.” Journal of Business Research 7(3):219–42.CrossrefGoogle Scholar

  • Ross, S., R. Westerfeld, and J. Jaffe. 2007. Modern financial management, 8th ed. McGrawhill: London.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 Finance 34(8):1970–81CrossrefGoogle Scholar

  • Shaked, I., and S. Kempainen. 2009. “A Review of Fairness Opinions and Proxy Statements: 2005–2006.” Journal of Applied Finance 19(1–2):103–28.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 Strategy 2:117–27.CrossrefGoogle Scholar

  • Strotmann, H. 2007. “Entrepreneurial Survival.” Small Business Economics 28(1):87–104.CrossrefGoogle Scholar

  • Sutton, J. 1997. “Gibrat’s Legacy.” Journal of Economic Literature 35(1):40–59Google Scholar

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

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

  • Wagner, J. 1994. “The Post-Entry Performance of New Small Firms in Manufacturing Industries.” Journal of Industrial Economics 42(2):141–54.CrossrefGoogle Scholar

About the article

Published Online: 2014-12-24

Published in Print: 2015-01-01


Citation Information: Journal of Business Valuation and Economic Loss Analysis, ISSN (Online) 1932-9156, ISSN (Print) 2194-5861, DOI: https://doi.org/10.1515/jbvela-2014-0003.

Export Citation

©2015 by De Gruyter. Copyright Clearance Center

Comments (0)

Please log in or register to comment.
Log in