Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

How long do firms live? Research finds patterns of company mortality in market data

02.04.2015

It's a simple enough question: how long does a typical business have to live? Economists have been thinking about that one for decades without a particularly clear answer, but new research by scientists at the Santa Fe Institute in New Mexico reveals a surprising insight: publicly-traded firms die off at the same rate regardless of their age or economic sector.

Companies come and go for a variety of reasons. Some are bought, some merge with others, and some go out of business completely. There's no shortage of theories about why.


Sizes of some 30,000 companies traded publicly on US markets from 1950-2009, measured by their sales (controlling for inflation and GDP growth). The relatively rapid growth of smaller companies near the beginnings of their lifespans account for the ragged lower portion of the chart, as well as the relatively steep initial sales increases. As companies reach maturity, their sales tend to level off.

Credit: Marcus Hamilton and Madeleine Daepp

"The theory of the firm--there are whole books on what people think is going on," says Marcus Hamilton, an SFI postdoctoral fellow and corresponding author of a new paper published in the journal Royal Society Interface.

Despite that, he says, "there is remarkably little quantitative work" on what economists call company mortality, and existing theory and evidence yield contradictory answers. Some researchers think younger companies are more likely to die than older ones, while others think just the opposite.

"We wanted to see if there was any kind of standard behavior or if it was just random," Hamilton says.

Hamilton, SFI Distinguished Professor Geoffrey West, and SFI Professor Luis Bettencourt asked Madeleine Daepp, then an Edward A. Knapp Undergraduate Fellow at SFI and first author of the new paper, to take the lead. "We gave her this basic idea, and she did the heavy lifting," Hamilton says. Daepp is now a graduate student at the University of British Columbia.

The heavy lifting, Hamilton explains, was going through Standard and Poor's Compustat, an expansive database of information on publicly-traded companies dating back to 1950. Using a statistical technique called survival analysis, Daepp and her mentors discovered something no one had predicted: a firm's mortality rate -- its risk of dying in, say, the next year -- had nothing to do with how long it had already been in business or what kinds of products it produced.

"It doesn't matter if you're selling bananas, airplanes, or whatever," Hamilton says -- the mortality rate is the same. Though the number, of course, varies from firm to firm, the team estimated that the typical company lasts about ten years before it's bought out, merges, or gets liquidated.

"The next question is, why might that be?" Hamilton says. The new paper largely avoids engaging with any particular economic model, though the researchers have some hypotheses inspired by ecological systems, where plants and animals have their own internal dynamics but must also compete for scarce resources -- just like businesses do.

John German | EurekAlert!

Further reports about: SFI ecological systems heavy lifting mortality mortality rate

More articles from Business and Finance:

nachricht How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung

nachricht Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Traffic jam in empty space

New success for Konstanz physicists in studying the quantum vacuum

An important step towards a completely new experimental access to quantum physics has been made at University of Konstanz. The team of scientists headed by...

Im Focus: How gut bacteria can make us ill

HZI researchers decipher infection mechanisms of Yersinia and immune responses of the host

Yersiniae cause severe intestinal infections. Studies using Yersinia pseudotuberculosis as a model organism aim to elucidate the infection mechanisms of these...

Im Focus: Interfacial Superconductivity: Magnetic and superconducting order revealed simultaneously

Researchers from the University of Hamburg in Germany, in collaboration with colleagues from the University of Aarhus in Denmark, have synthesized a new superconducting material by growing a few layers of an antiferromagnetic transition-metal chalcogenide on a bismuth-based topological insulator, both being non-superconducting materials.

While superconductivity and magnetism are generally believed to be mutually exclusive, surprisingly, in this new material, superconducting correlations...

Im Focus: Studying fundamental particles in materials

Laser-driving of semimetals allows creating novel quasiparticle states within condensed matter systems and switching between different states on ultrafast time scales

Studying properties of fundamental particles in condensed matter systems is a promising approach to quantum field theory. Quasiparticles offer the opportunity...

Im Focus: Designing Architecture with Solar Building Envelopes

Among the general public, solar thermal energy is currently associated with dark blue, rectangular collectors on building roofs. Technologies are needed for aesthetically high quality architecture which offer the architect more room for manoeuvre when it comes to low- and plus-energy buildings. With the “ArKol” project, researchers at Fraunhofer ISE together with partners are currently developing two façade collectors for solar thermal energy generation, which permit a high degree of design flexibility: a strip collector for opaque façade sections and a solar thermal blind for transparent sections. The current state of the two developments will be presented at the BAU 2017 trade fair.

As part of the “ArKol – development of architecturally highly integrated façade collectors with heat pipes” project, Fraunhofer ISE together with its partners...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Sustainable Water use in Agriculture in Eastern Europe and Central Asia

19.01.2017 | Event News

12V, 48V, high-voltage – trends in E/E automotive architecture

10.01.2017 | Event News

2nd Conference on Non-Textual Information on 10 and 11 May 2017 in Hannover

09.01.2017 | Event News

 
Latest News

Helmholtz International Fellow Award for Sarah Amalia Teichmann

20.01.2017 | Awards Funding

An innovative high-performance material: biofibers made from green lacewing silk

20.01.2017 | Materials Sciences

Ion treatments for cardiac arrhythmia — Non-invasive alternative to catheter-based surgery

20.01.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>