Insight

Growth path of firms

Will a a firm’s performance fall with age?

Managerial wisdom suggests that a firm’s performance (expressed as Tobin’s q, which is the ratio of the market value of a firm’s physical assets to their replacement value) falls with age, as it focuses on maintenance of assets rather than growth. Claudio Loderer, René Stulz and Urs Waelchli found that with robust competition in the goods market, this logic no longer holds, as firms start hiring employees who can help generate growth. Cut-throat competition definitely helps.