The lifecycle of the firm, corporate governance and investment performance

Abstract

According to firm lifecycle theory the agency costs of free cash flows are not transitory problems but are a persistent issue for mature firms. This paper extends the theory by suggesting that to neutralize the threat of takeover the controlling parties of maturing firms progressively deploy antitakeover provisions, and this allows them to overinvest safely and prevent retrenchment. Another contribution of this paper is to develop a new empirical index that permits the identification of mature corporations with governance problems due to agency costs of free cash flows. Empirical results show that as firms mature free cash flows increase, more antitakeover provisions are put into place and negative net present value projects are undertaken.