The Value Relevance of Financial Performance Measures During Firm Life Cycle Stages

Abstract

This study aims at investigating the value relevance of selected financial performance measures during the various stages of the firm life cycle according to (Ohlson, 1995) valuation model. The selected financial performance measures are: net income, cash flows from operating activities, cash flows from investing activities and cash flows from financing activities. The book value of net assets is used as a control variable and finally the dependent variable in the study model is the firm market value. The study adopted (Dickinson, 2011) methodology to classify a firms’ life cycle into five stages, including; the introduction stage, the growth stage, the maturity stage, the shake-out stage and finally the decline stage. The study sample included 608 observations (company-year) of 78 industrial companies listed in Amman Stock Exchange (ASE) during the period 2006-2015. The results of the study revealed that all financial performance measures (altogether) are value-relevant during all stages of the firm life cycle. Yet, the value relevance of performance measures is different from one stage to another. In other words, some of the measures are value-relevant in certain stages and irrelevant in other stages. The results indicated that net income is value-relevant in the growth and in the maturity stages and irrelevant for the firm value in the rest of the stages. Furthermore, cash flows from operating activities are value-relevant in the shake-out stage and irrelevant in the rest of the stages. Finally, cash flows from investing activities and cash flows from financing activities are both irrelevant in all firm life cycle stages. The study recommends users of financial information to take into consideration the stage in which the firm is in its life cycle and the financial performance measure that is most value-relevant for the firm value at that stage, in order to help them in making investment and credit decisions.