Relationship between Life Cycle Stages of the Firm and Implied Cost of Capital, Based on Dynamic Resource-based Theory

Abstract

According to the life cycle theory, firms, like living organisms, pass through a series of predictable patterns of development, and recognition of firms’ life cycle stages has important implications for understanding firms’ financial performances. This study aimed to assess the question that whether capital cost varies over the life cycle of firm, or not. In other words, how much capital costs could be affected by life cycle stages? Using a sample of 124 firms between 2007 and 2015, we observed variation of cost of equity capital over the life cycle of firms. In this study, firms’ life cycle were measured by Dickinson’s (2011) and DeAngelo (2006) models, and the same as earlier studies, cost of equity were estimated by the implied approaches, in particular, Easton (2004) and Ohlson and Juettner-Nauroth (2005) models. Findings showed that cost of equity is higher in beginning and in decline stages, and lower in growth and in mature stages. When DeAngelo (2006) life cycle measure (the ratio of retained earnings to total assets) was used, the findings indicated that cost of equity decreases as the ratio measure increases.

Keywords

• implied cost of capital
• dickinson’s life cycle
• deangelo’s life cycle
• dynamic resource-based theory