Within the context of corporate finance research, it appears logical to include ‘firm age’ as a determinant of company performance (e.g. accounting returns or stock returns), and most studies include 'firm age' as determinant of company performance. But, the theoretical motivation for including firm age as determinants of company performance seems unclear. What specific theory explains the relationship between firm age and company performance (if any)?
I don't know any such study. But, I think age of the firm directly is not affecting firm performance as this is one of the many variables i.e. as considered control variables. However, age moderates the performance in any way.
I think it is a disputable question, but we can consider two hypotheses. First, a long history (age) can confirm stability in business relations. Secondly, even less clear, I think age can be a proxy for size.
Firm age is used as a control variable. In my opinion, the variable would include some specific characteristics of the company. First, it captures the differences in the life cycle of the company. As argued by Faccio et al (2011) “This variable controls for differences in the life cycle of a firm, as one would expect that firm riskiness may decline with firm age” (Large shareholder diversification and corporate risk-taking, p. 14).
Second, it could be a good proxy about the relational network of the company and, therefore, as argued by Victor, “can confirm stability in business relations”.
Third, firm age might be a good variable to measure the relationship with capital structure. Older firms should be a “cash cow” and theoretically should be able to generate internal financing funds.
In family businesses, finally, the age indicates a generational change and innovation in the management and adoption of best practices that improve performance.
I would control for firm age as a control, not independent, variable. Consequently, the relevant theory would be the one supporting the impact of the independent variables on the dependent variable, firm performance.
a good reference here is certainly "Like milk or wine: Does firm performance improve with age?" http://www.sciencedirect.com/science/article/pii/S0954349X12000422. Check it out. Best. Massimo
Hi
Firms' age may be a good proxy for firm size, Thus you may find a good correlation between firm age and firm total assets. For sure the life cycle of the firm is at stake here (local sales, domestic sales then exports, and international development including investment abroad). But to enlarge your perspective Corporate Social Responsability seems also to be correlated with firm age but not with industry-adjusted Tobin Q, You can read the following paper to get some insights in theses fields:
H Jo, M A Harjoto, "Corporate Governance and firm value : The impact of corporate social responsability" Journal of business ethics, 2011, 103, p351 -383.
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