Working Paper: NBER ID: w19428
Authors: Claudio Loderer; Ren Stulz; Urs Waelchli
Abstract: As firms have more assets in place, more of management's limited attention is focused on managing assets in place rather than developing new growth options. Consequently, as firms grow older, they have fewer growth options and a lower ability to generate new growth options. This simple theory predicts that Tobin's q falls with age. Further, competition in the product market is expected to slow down the decrease in Tobin's q because it forces firms to look for alternative sources of rents. Similarly, greater competition in the labor market reduces the decrease in Tobin's q with age because old firms are in a better position to hire employees that can help with innovation. In contrast, competition in the market for corporate control should accelerate the decline because it forces management to focus more on managing assets in place whose performance is more directly observable than on developing growth options where results may not be observable for some time. We find strong support for these predictions in tests using exogenous variation in competition.
Keywords: managerial attention; corporate aging; Tobin's q; competition; innovation
JEL Codes: G30; L20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| managerial focus shift (L21) | Tobin's q (G19) |
| increased competition in corporate control (G34) | managerial focus shift (L21) |
| labor market competition (J29) | innovation employee availability (O36) |
| innovation employee availability (O36) | growth opportunities (O36) |
| firm age (L10) | managerial focus shift (L21) |
| firm age (L10) | Tobin's q (G19) |
| competition in product markets (L13) | Tobin's q (G19) |