Firm Age and Valuation: Evidence from Korea

Abstract

Using Korean stock market data, we document evidence that firm age is a key determinant of firm value. Specifically, firm value (measured by the market-to-book equity ratio) has a downward sloping relation with firm age. We also find that profitability and capital expenditures decline as firms age, suggesting that firms may become less valuable with age as they become less profitable and run out of investment opportunities. Our evidence also suggests that firms conduct IPOs by capitalizing on a small window of opportunity for listing during which their profitability is temporarily at its peak. Because this profitability is not sustainable, IPO issuers experience a sharp drop in profitability, contributing to a negative relation between firm value and age in the post-IPO period. The learning hypothesis of Pástor and Veronesi () is unable to explain the negative firm age-value relation in the Korean stock market, given that uncertainty does not decline with age and that the negative relation is either non-existent or very weak among dividend-non-payers.