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The results reveal that the effect of age on firms is much weaker for this subsample.

In unreported results, replicating the regressions on firms with age above the median in the simulated data set yields age effects that, although significant, are much smaller than those for young firms.

The distinction inevstment the diagrams reflects the fact that an increase in the investment tax credit will result in a rise in the steady-state value of k which implies haashi fall in the pretax marginal product of capital. Young firms also obtain external financing at a higher frequency than mature firms. Volatility is measured as the average over the past three years filethpe the absolute value of the difference between profitability and its three-year moving average.

Further, due to competitive pressures from new entrants with higher output productivity, the model generates the slow decline in average profitability for mature firms observed in the data.

High product development expenses and physical investment lead young firms to obtain external finance more frequently. The analysis demonstrates a linear effect of age on the firm’s policies. Testing the first prediction using data on listed and unlisted U. Table 6 presents the corresponding results obtained from the Amadeus data set. Journal of Finance All variables except firm age and size are Winsorized at the 1 percent level to reduce the impact of outliers.


These include not only research and development expenditures, but also expenditures such as advertising that can potentially increase the demand for a good. Section 5 uses simulation methods to derive further implications from the model. As before, Panel A presents linear panel regressions for sales growth, investment, and dividends; Panel B presents logit regressions on whether the firm obtained a quality increase and on whether it obtained external financing.

In the model, productivity measures the quantity of goods that can be produced by a unit of inputs and quality measures the relative importance of that good in the consumption aggregator.

Panel B presents logit regressions on invesfment jumps, and external financing. Thus, mature firms have slower growth and they return their surplus cash flows to shareholder through dividend payouts.

What drives this higher investment in product development in the model? Each period, a firm spends resources on product development, denoted by.

Including a measure of firm level profitability volatility in the logit regressions does not change the basic results. Panel regressions Table 4: The age coefficients for all the regressions are significantly less negative than those obtained with young firms in Table 6. In comparison, age effects arise for mature firms less due to changes in quality indices and more due to changes in their competitive position, which changes slowly, leading to a smaller effect of age on the policies of mature firms.

The overall predictive power of the regression is quite low, reflecting the high variability of profitability changes in the data. The source data for the U.

Profitability and the Lifecycle of Firms

In addition, we can test the further implications of the model. Section 2 details the construction of the sample using the Amadeus data set and the variable definitions. These findings suggest that age has a marked effect on the growth and financing decisions of the firm, as noted in the literature.


This finding supports the mechanism highlighted in the model, where higher product development expenses generate more frequent quality increases for young firms.

Investment tax credit ITC. Instead, a model based on quality increases through product development endogenously generates this age profile of profitability changes. In economic terms, the above Bellman equation states that the value of a firm in a given quality stage equals the dividend payment plus the expected future value of the firm. Increased product development expenses and high investment rates imply that young firms require external financing more often.

The autocorrelation and standard deviation of productivity shocks are set to 0. The detrended next period capital of a firm is given by. The model abstracts from financial frictions in order to focus on the impact of the product development mechanism.

The Abel ()-Hayashi () Marginal q Model

Panels A, B, and C present the results for all firms, firms with age less than or equal to its median value, and firms with age above its median value, respectively. Comparison of these regression results with those obtained using simulated data in Section 5.

Inevstment 3 presents the results of regressions of various firm policies on firm age and controls. Firms are born, live, and die. This setup reflects the basic structure of the quality ladder literature. This simulated sample provides a steady state cross-section of firms that can be employed to investigate firm policies in the model.