An empirical assessment of a firm lifespan model (FLM)

Submission note: A thesis submitted in total fulfilment of the requirements for the degree of Doctor of Philosophy to the La Trobe Business School, College of Arts, Social Sciences and Commerce, La Trobe University, Bundoora.

This study proposes a model for the economic lifespan of a firm that, unlike predecessors such as the Profit-Maximising Firm (PMF) and the Product-Life-Cycle (PLC) models, recognises the symbiotic relationship between trading and the resources available to the firm to allow it to trade. This shift overcomes concerns about the motivation of a firm and allows the model to be applicable to all types of firms including multi-product firms, monopolies and non-profits. This study proposes an alternative hypothesis that: the lifespan of a firm is dependent upon having sufficient Expendable Resources (a combination of Investment and Trading performance). The latter part of this hypothesis has a subsumed reliance upon the effects of demand-ceilings and competition to influence the eventual lifespan of any specific firm. This model avoids the over-reliance of previous models upon an expected chronologically based behaviour of specified variables. Instead, this study proposes a Firm Lifespan Model (FLM) based on specific variable characteristics in order to classify the lifespan phase of a firm. This study also proposes an equation that defines the economic forces and their relationships that dictate the longevity of any specific firm. These innovations enable the FLM to be more useful than traditional univariate, multivariate and statistical-based models of predicting failure. The efficacy of the proposed FLM was compared to binary-outcome predictive conditions for different definitions of resources. This study proportionately selected 192 firms from a population of 1,919 entities publicly listed on the Australian Securities Exchange (ASX) on 17 August 2007 for analysis. A total of 14 firms from the sample were defined to have failed. With better overall results than the applications of binary-outcome predictive conditions, the FLM successfully classified the period and circumstances in which 12 of the 14 firms in the sample that failed would occur.