Firm Rigidities and the Decline in Growth Opportunities

As public firms exploit their growth opportunities following their initial public offering, their assets in place increase, and they organize themselves optimally to operate these assets efficiently, which requires a more formal and less flexible organization than to generate new growth opportunitie...

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Bibliographic Details
Published in:Management science 2017-09, Vol.63 (9), p.3000-3020
Main Authors: Loderer, Claudio, Stulz, René, Waelchli, Urs
Format: Article
Language:English
Subjects:
Assets
Capital markets
Competition
corporate governance
firm age
firm life cycle
firm performance
firm rigidities
Growth
Initial public offerings
Labor market
Management
Public buildings
Publicly held corporations
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Summary:As public firms exploit their growth opportunities following their initial public offering, their assets in place increase, and they organize themselves optimally to operate these assets efficiently, which requires a more formal and less flexible organization than to generate new growth opportunities. Our theory predicts that, as a result of these inflexibilities, firms fail to fully replace their growth opportunities, so that their Tobin’s q falls with age and they invest less as they grow older. With our theory, competition in the market for corporate control and capital markets monitoring increase the rate of decrease in Tobin’s q , while product and labor market competition slow it down. We find empirical support for these predictions. We also find evidence that the decline in q is related to firm rigidities. The Internet appendix is available at http://dx.doi.org/10.1287/mnsc.2016.2478 . This paper was accepted by Gustavo Manso, finance .
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2016.2478