AGE AND CASH FLOW PATTERNS AS PROXIES FOR CLASSIFYING FIRM’S LIFECYCLE STAGES IN THE

NIGERIAN QUOTED COMPANIES

BY

Rosemary O. OBASI
Department of Accounting, Benson Idahosa University, Benin city Edo State, Nigeria
bsrosemary@yahoo.com / robasi@biu.edu.ng
+2348053314596

&

Chizoba M. EKWUEME
Department of Accountancy, Nnamdi Azikiwe University, Awka, Anambra State, Nigeria
E-mail: c.m.ekwueme@unizik.edu.ng/ekwuemecm@gmail.com

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 ABSTRACT

This study examined the firm life cycle theory using classification proxies (Age and Cash flow patterns)
to ascertain which one best classifies firm life cycle stages in Nigeria. The researchers extracted data
from published annual report and accounts of one hundred companies’ listed on Nigerian Stock
Exchange from 2004 to 2013 using two panels which were categorised by the use of Cash flow
patterns and Age (panel A and B) respectively. Descriptive analysis was used to ascertain the panel
that best conforms to extant economic assertions relating to firm life cycle stages. The study found that
panel A was more consistent with extant economic predictions. Also, free cash flow was maximised in
the introduction stage, and shakeout firms face intensive competition where operational emphasis shifts
to cost reduction and improved capacity utilization as against the predicted mature firm. Thus, the study
concluded that Nigeria companies support the life cycle theory using cash flow patterns as a proxy, and
is, therefore, recommending the use of cash flow patterns by corporate managers to identify firms’ life
cycle stage to analyze, solve and predict entities’ key operational goals.
Keywords: Life cycle theory, cash flow statement, cash flow patterns, accounting proxy

1 INTRODUCTION

Firm Life Cycle Stage theory (FLCS) has faced a lot of academic polemics since the past five decades

{Mason (1959), and Chandler (1962)}. These academic polemics were necessitated because the

originators of the theory only enlightened readers on FLCS existence without identifying the indicator(s)

to use in classifying the firms’ life cycle stages. However, the outcomes of the various studies

conducted since then have shown that Age, Size, Profitability, sales volume were outlined as factors for

classifying firms into its life cycle stage (see Mueller 1972, Miller and Friesen 1984, Anthony and

Ramesh 1992, Black 1998 and Dickinson 2011).

In a recent research, Dickinson, (2011) posited that the use of cash flow patterns best explains firm’s

life cycle stage. This new development has brought in the accounting dimension to the life cycle theory

that was initially an economic theory. In the study’s view, this discovery is interesting and since it has

been tested empirically in America, the researchers used this study to ascertain the Nigeria evidence to

support or negate the cash flow patterns as a proxy for firms’ life cycle stages.

1.1 Research questions

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 The basic questions of the study are:

a) To what extent do cash flow patterns and age support Firm Life Cycle Stages (FLCS) based on

extant economic predictions as a proxy for FLCS classification?

b) Are Nigerian listed firms’ cash flow patterns similar to the firms stated in Dickinson’s report?

1.2 Research Objectives

The primary objectives are:

a) To examine the extent to which life cycle stages (as represented by Cash flow patterns and

age) support the extant economic predictions of firm life cycle stages, and

b) To explore whether Nigerian listed firms cash flow patterns are similar to the firms stated in

Dickinson’s report

Firms’ life cycle stage is of great importance to a variety of companies’ stakeholders because; the stage

of an organisation to investors, shareholders, regulators, government and even international

stakeholders cannot be overemphasized. The life cycle stage of a firm tells a lot about the firm and

enables appropriate attention if need be, to be administered by the firm. Therefore, the discovery of an

acceptable proxy for FLCS is of paramount importance.

2 REVIEW OF LITERATURE

Cash flow statement is classified into three categories, namely; operating activities, investing activities,
and financing activities. The combination of cash flow patterns represents the firm’s resource allocation
and operational capabilities interacting with the firms’ choice of strategy. Predictions about each cash
flow component can be derived from an economic theory that forms the basis for the cash flow patterns
proxy for the life cycle.

2.1 FIRM LIFE CYCLE THEORY

Mason (1959) propounded the firm life cycle theory. The firm life cycle (FLC, hereafter refers to as

OLC) is a model that proposes that over the course of time, business firms move through a relatively

predictable sequence of developmental stages. It is based on a biological metaphor that business firms

resemble living organisms because they demonstrate a regular pattern of the developmental process.

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Organizations that are said to pass through a recognizable life cycle are fundamentally impacted by

external environmental circumstances as well as internal factors (Gibson, Ivancevich, & Donnelly,

1994). Mason (1959) developed the life cycle theory but did not indicate how these firms will be

categorised into the various stages. Chandler (1962) introduced stages to a life cycle model when he

noted that as stages changed, so did firms' strategies and structures. Organizational life cycle models

vary widely in some features, including the actual number of stages. Miller and Friesen (1980)

suggested a rough sequential ordering of stages: birth, growth, maturity, and revival.

2.2 CASH FLOW PATTERN AND LIFE CYCLE STAGE

Firms in the introduction stage, lack established customers and suffer from knowledge deficits about

potential revenues and costs, both of which result in negative operating cash flows (Jovanovic, 1982).

However, profit margins are maximized during increases in investment and efficiency (Spence 1977,

1979, 1981; Wernerfelt, 1985) which means operating cash flows are positive during the growth and

maturity stages. Wernerfelt (1985) pointed out that declining growth rates will eventually lead to

declining prices such that operating cash flows will decrease (and become negative) as firm enter the

decline stage. Managerial optimism (Jovanovic, 1982) encouraged firms to make early investments that

ultimately serve to deter entry into the market by competitors (Spence 1977, 1979, 1981).

Consequently, investing cash flows are negative for introduction and growth firms. While mature firms

decrease investment compared to growth firms, they will invest to maintain capital (Jovanovic, 1982;

Wernerfelt, 1985). If the cost of maintenance increases over time (i.e., rising prices), investing cash

flows are negative for mature firms, although at a lesser magnitude than cash outflows for introduction

and growth firms. Decline firms will liquidate assets to service existing debt and to support operations

which result in positive cash flows from investing. The reporting outcome of these three categories (i.e.

operating, financing and investing cash flows) could either result to excessive cash outflows

represented as a negative amount (i.e. - neg). Therefore, they could be patterned as + or -. Thus, the

different combinations of these patterns signify the life cycle stage of a firm. Cash flow analysis using

cash flow patterns can be used to assess firms’ financial strength as well as its life cycle stage.

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Table 1: Cash Flow Patterns and Life Cycle Stages

LIFE CYCLE CASH FLOW PATTERN KEY: CFO – Operating Cash flow;
STAGE
CFI – Investing Cash flow; and
Introduction CFO (-), CFI (-) and CFF (+)
stage CFF – Financing Cash flow.

Growth stage CFO (+), CFI (-) and CFF (+)

Maturity stage CFO (+), CFI (-) and CFF (-)
Shake-out stage CFO (-/+), CFI (-/+) and CFF (-/+)
Decline stage CFO (-/+), CFI (+) and CFF (+/-)
SOURCE: Dickinson Victoria (2011). Cash flow patterns as a proxy for firm life cycle. The Accounting
Review, 86 (6): 1969 – 1994.
2.3 EXTANT ECONOMIC PREDICTIONS

Drawing on the work of Knight (1921) and Schumpeter (1934), Mueller (1972) posits that a firm

originates in an attempt to exploit an “innovation involving a new product, process, marketing or

organizational technique.” The firm in its initial stages invests all available resources in developing the

innovation and improving its profitability. The firm’s growth is likely to be slow until it has successfully

sorted out “teething issues” and establishes a foothold in the market share. After that, the enterprise will

grow rapidly, as it enters new markets, enjoys peck and expands its customer base before any major

competition can arise. Dickinson (2011) reported therefore that profitability is maximised at the mature

stage. Also, Selling and Stickney (1989) as reported by Dickinson (2011), product- differentiating firms

focus on research and development, advertising and capacity growth. The effect of such expenditures

is reflected in a higher profit margin (PM). Also, Fama and French (2001) examined the United States

industrial firms and suggested that newly listed firms tend to be smaller with low profitability and strong

growth opportunities while Yazdafar, Salman and Arnesson (2013) empirical study indicated that the

firm profitability changes systematically over its life cycle stages. The firm faces so many opportunities

for profitable investment that the pursuit of growth is also consistent with the pursuit of profits at the

earlier stages of its life cycle. Also at these stages, unable to meet all its financing needs through

internal cash generation, the firm is forced to tap external capital markets after trying the banks for

loans (see Perk order theory by Shyan-Sunder & Myers, 1999; Chirinko & Singha, 2000; and Lemmon

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& Zender, 2007) and is, therefore, subject to market monitoring and discipline. After a while,

competitors begin to enter the market, adapting and improving upon the pioneering firm’s innovations.

As existing markets become saturated, and new markets are harder to find, the growth of the firm

begins to slow down. To maintain growth and profitability, the firm needed to generate innovations.

However, as the firm grows as an organization, its ability to process information deteriorates, and the

risk-taking incentives of the average manager diminish. These factors place a limit on the capacity of a

large firm to grow through innovations. As a result, the firm eventually reached a point where it lacks

profitable investment opportunities for the cash generated from its existing operations. At this “mature

stage,” a shareholder value-maximizing firm would begin distributing its earnings to its shareholders.

Eventually, when all the existing activities of the firm are on the verge of becoming unprofitable, a

value-maximizing firm would liquidate all assets and distribute the proceeds to its shareholders.

However, when the managers of a firm do not pursue strict value-maximization but are rather interested

in expanding the size of the firm to reap perks and other rewards, the distribution of earnings to

shareholders will deviate from the optimal policy ( Laarni, Bulan, & Subramanian, 2005)

Pecking order theory stated that firms initially access bank debt followed by equity later in their life

(Myers, 1984; Diamond, 1991). Barclay and Smith (1995) demonstrated that growth firms will obtain

debt that is shorter in duration than mature firms. Taken together, financing cash flows are positive for

introduction and growth firms. However, mature firms will begin to service debt and distribute cash to

shareholders as they exhaust positive net present value investment opportunities, which results in

negative financing cash flows. There is a void in the literature on whether financing cash flows will be

positive or negative for decline firms.

Dividend payout is the trade-offs’ between retention and distribution of profits that motivates the life

cycle theory. The dividend is largely consistent with the disciplining explanation and is important to

firms that potentially have the agency problems such as Jensen’s (1986) free cash flow problem. In

effect, the maturity hypothesis on the timing of changes in dividends in Grullon, Michaely, and

Swaminathan (2002) is supported in a sample of players with detectable levels of dividends, or typical
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players. Brav, Graham, Harvey and Michaely (2005) survey result suggested that maintaining the

dividend level (persistent financial policy) is a priority on par with investment decisions, the first-order

concern to managers, and hence are consistent with the growth type view.

There has been a popular notion that because of last resort of new equity in Myers (1984)

pecking order of financing, high growth firms cannot afford to pay dividends (see De Angelo, De

Angelo, & Stulz, 2006). The growth-stage view, however, suggested that since high growth type can

facilitate new equity issuance, it is unnecessary for high growth stage firms to use dividends as a

signal. Whereas, the firm life cycle theory of a dividend contended that the optimal dividend policy of a

firm depends on the firm’s stage in its life cycle. The underlying premise is that firms follow a life-cycle

trajectory from the origin to maturity that is associated with a shrinking investment opportunity set,

declining growth rate, and decreasing the cost of raising external capital. Bulan, Subramanian, and

Tanlu (2007) found that firms that initiate dividends are mature firms. Over time, after a period of

growth, the firm reaches a stage of maturity in its lifecycle. At this point, the firm’s investment

opportunity set is diminished, its growth and profitability flattened, the systematic risk also declined, and

the firm generated more cash internally than it can profitably invest. Eventually, the firm began dividend

payments to distribute its earnings to shareholders. The empirical evidence on dividend initiations and

changes supported the life cycle theory of dividends but is contrary to the signalling theory. Benartzi,

Michaely and Thaler (1997) found that dividend increases are not followed by an increase in the

earnings growth rate, while dividend reductions are associated with an improvement in the growth rate.

Grullon et al. (2002) found that firm profitability declines following a dividend increase and increases

following a dividend decrease. Mueller (1972) also traced the implications of the life cycle theory of the

firm to dividend policy. The intuition for this optimal policy is the same as that underlying Mueller’s

(1972) argument that a value-maximizing firm should maintain a zero payout ratio at the initial stages

and increase the payout to 100% upon reaching maturity. Mueller (1972) linked dividend policy to the

firm’s life cycle, stating that the freedom to pursue growth, and the management stockholder conflict

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that accompanies it appear only over time as the firm expands and matures. On a similar note, Jensen

(1986) noted that the shareholder-manager conflict is particularly severe in firms with large free cash

flow, that is, cash flow more than investment opportunities, coining the phrase Agency cost of free cash

flow to denote this problem. Jensen (1986) suggested agency problems increase with free cash flows,

which are higher for mature firms compared with smaller firms. Most market research points to either

the signalling or free cash flow hypothesis. Woan-Lihliang, Konan Chan, Wei-Hsien Lai and Yanzhi

Wang (2011) found that the motives for repurchases differ depending on the firm’s life cycle stage.

Specifically, they found that a firm in the growth stage tends to announce a repurchase program to

signal its undervalued stock, whereas a firm in the mature stage is prone to buy back shares to

dispense excess free cash flow.

Grullon et al., (2002) proposed and presented evidence in support of the hypothesis that the

systematic risk of firms declines around dividend increases. They explained the decline as being

caused by a decline in the number of growth options, including compound options, held by the firm.

This is, of course, a joint explanation for a reduction in both the cost of capital and the return on

investment with maturity.

Firm size (in both assets and sales) is increasing as the firm evolves over its life cycle. Growth firms

are the smallest while firms in decline are the largest in numerical strength. Moreover, mature firms are

about 40 % larger (in both means and medians) than growth firms (this difference is significant)

(Zhipeng, 2006). However, Dickinson (2011) posited that matured firms are the largest signifying the

nonlinearity of both variables SIZE and AGE. Young firms face more uncertainty than older firms

(Evans, 1987), while managing a growth firm is more difficult than managing a mature firm, as indicated

by higher management compensation for growth firms (Gaver & Gaver, 1993). Miller and Friesen

(1984) showed that on average, each stage lasts for six years, the shortest interval being 18 months,

the longest, 20 years. However, Zhipeng (2006) proposed that each stage should last for more than

one year. Hence, we intend to check for the duration of each stage using the six years as our test base.

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 Regarding financing characteristics, researchers found that mature firms have much higher

market leverage, but this stark difference is not present when looking at book leverage. Finally, studies

showed that growth firms have larger financing deficits, as expected. There seems to be no difference

in net debt issues between the two cohorts while net equity issues are larger for the growth firms.

Moreover, growth firms have leverage ratios that are higher or comparable to their mature firm

counterparts. As to external financing, growth firms have a much greater need for external financing

than the matured firms. Myers (1993) said debt ratios change when an imbalance of internal cash flow

and real investment opportunities occurs. Highly profitable firms with limited investment opportunities

work down to a low debt ratio. Firms whose investment opportunities outrun internally generated funds

are driven to borrow more and more.

Essentially, when the firm’s investments promise a rate of return (ROE) higher than the firm’s cost of

capital (k), it makes economic sense for the firm to reinvest all of its earnings in new assets. If growth

companies get the bulk of their value from growth as growth assets, mature companies must get the

bulk of their value from existing investments. ROE is a good basic proxy for the quality metrics the

select team evaluates (Woodhams, 2012). The team analyzed ROE in the context of a company’s life

cycle, and its current stage of development—ROE and other measures of quality cannot be viewed in

the same way for companies at different stages of the corporate life cycle. For example, a company in

its growth phase should have lower profit margins and free cash flow generation than one at a mature

phase. Viewed this way, growth is, by definition, tied to quality. Thus, “quality growth” is not an

oxymoron. Rather, quality and growth have a symbiotic relationship: The higher the return on equity,

the faster the growth; the faster the growth in profits, the higher the return on equity. High quality, or

more specifically, high profitability, leads to higher growth (American century,2012).

Return on Asset: on global industry analysis, Investopedia (2012) reported that there are many key

elements related to return expectations such as demand, value creation, industry life cycle and

competition.Underpinning the select portfolio alpha strategy is the belief that ownership of companies

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exhibiting a combination of growth, quality, momentum, and valuation will generate outperformance

over time. Understanding the life cycle of a growth company and its cash generating potential are key

to successful execution of the strategy.

Investors frequently associate “quality” with earnings visibility, high profitability, strong balance sheets,

and significant free cash flow generation. It is evident that a company in its growth phase should exhibit

a level of profitability below more mature companies as an investment in both fixed and operating

expenses are a higher percentage of revenue.

When valuing mature companies, it is often overlooked by the fact that they have long periods of stable

operating history into believing that the numbers from the past (operating margins, returns on capital)

are reasonable estimates of what existing assets will continue to generate in the future. However, past

earnings reflect how the firm was managed over the period. To the extent that managers may not have

made the right investment or financing choices, the reported earnings may be lower than what the

existing assets would be able to produce under better or optimal management (Faugere, & Hany

Shawky, 2005).

Earnings Per Share (EPS) and Volatility of EPS (VEPS) refer to the magnitude or the extent of

fluctuation of EPS of a firm in various years as compared to the mean or average EPS. EPS volatility

helps to focus whether a company enjoys a stable income or not. Accordingly, higher EPS volatility

represents greater risk attached to the company. EPS volatility criterion is necessary to measure the

financial performance of concern. Fluctuations in the sales volume and the operating leverage are the

primary causes of the EPS volatility. EPS volatility helps to avoid the financial risk of a firm. A small

change in sales can lead to a dramatic shift in the earnings of a firm when its fixed costs and debt are

high. As a result, the shareholders perceived a high degree of financial risk if the debt is employed by

such a company.

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 Anthony and Ramesh (1992) found empirically that stock market reactions to growth and capital

expenditure are functions of the life cycle stage. Thus, while changes in firm characteristics and

performance are individually correlated with where a firm is in its life cycle, it is the variation and the

interaction of all these factors taken together that determine precisely where a firm is in its life cycle.

3 RESEARCH METHODS
The longitudinal design was adopted. The population of the study is 129 companies made up of the ten

sectors out of thirteen on the Nigerian Stock Exchange (NSE). The other three sectors were excluded

because they are termed regulated sectors and hence might not experience natural developmental

tendencies. The cash flow statements of one hundred companies that submitted their annual financial

statement to the NSE from 2004 to 2013 were used. The companies were classified into their different

yearly life cycle stages using the cash flow patterns as shown below in Table I PANEL A. For Table 1

PANEL B, the firms were classified into their various life cycle stages using the age of the company as

measured below;

Introduction------1 - 6 years
Growth- -------- 7 - 19 years
Mature--------- 20 - 35years
Shake-out----- 36 - 40 years
Decline- ------ 41 and above

This decision was based on literature reviewed [see Miller & Friesen, (1984); Zhipeng, (2006)]. The

various data were elicited from the companies’ annual financial report. The annual financial report is a

reliable corporate document published for the use of the public and the various stakeholders. The

decision rule in analyzing the descriptive statistics is that any one of the panels that showed support for

extant economic predictions is said to explain best the Firm Life Cycle Stages (FLCS) theory.

4 ANALYSIS AND DISCUSSION OF RESULTS

Table 1 is a presentation of the firm life cycle stages distribution.

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TABLE 1 PANEL A: LIFE CYCLE STAGES SURROGATED BY CASHFLOW PATTERN

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 TOTAL
INTRODUCTION 3 4 5 11 10 7 6 4 5 2 57

GROWTH 6 8 14 8 19 8 9 14 7 6 99

MATURED 41 34 33 37 36 41 52 41 37 31 383

SHAKEOUT 3 5 5 12 5 7 4 6 3 2 52

DECLINE 5 9 10 4 8 13 6 5 9 8 77

TOTAL 58 60 67 72 78 76 77 70 61 49 668

Source: researchers’ analysis (2014)

Based on the categorization in Panel A, firms in introduction stage across the period totalled 57, growth

firms 99, matured firms 383, shakeout firm 52, and decline firms 77, resulting in 668 firms while in

TABLE 1 Panel B below; the categorisation based on age, led in 108 firms in the introduction stage,

173 growth firms, 452 mature firms, 44 shakeout firms and 9 decline firms resulting into 786 in total.

TABLE 1 PANEL B: LIFE CYCLE STAGES SURROGATED BY AGE

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 TOTAL
INTRODUCTION 3 2 3 5 9 19 24 24 13 6 108

GROWTH 21 23 20 20 19 20 19 17 6 8 173

MATURED 47 48 50 50 52 50 47 49 34 25 452

SHAKEOUT 1 1 0 1 2 4 9 9 7 10 44

DECLINE 0 0 1 1 1 1 1 2 1 1 9

TOTAL 72 74 74 77 83 94 100 101 61 50 786

Source: researchers’ analysis (2014)

In this section, the data considering the research questions and treating each issue was analyzed.

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4.1 Cash flow patterns and the life cycle stages of quoted companies in Nigeria

This study focused on five distinct stages. These phases as described by Dickinson’s study are shown

below;

Table 2 Cash flow patterns

Predicted sign from cash Introduction Growth Mature Shake-out Decline

flow statement

Operating activities _ + + (-/+) (-/+)

Investing activities _ _ _ (-/+) (+)

Financing activities + + _ (-/+) (+/-)

Source: Dickinson, (2011). Cash flow patterns as a proxy for firm life cycle. The Accounting Review,86
6, 1972.

In the bid for this study to categorise the firms to answer this question:- are Nigerian listed firms’ cash

flow patterns similar to the firms stated in Dickinson’s report? The following patterns were discovered in

Nigerian companies as shown in Table 3.

Table 3: Cash flow patterns for Nigerian companies.

Predicted sign from Introduction Growth Mature Shake Decline ? ? ? ?

cash flow statement -out

Operating activities _ + + (-/+) (-/+) _ + + _

Investing activities _ _ _ (-/+) (+) No sign _ No sign _

Financing activities + + _ (-/+) (+/-) _ No sign _ No sign

Source: Obasi and Ekwueme’s results (2015)

Since the patterns with question marks were not described in Dickinson (2011) and other related

studies, then, it seemed this could serve for further research.

4.2 Firms’ life cycle stages as measured by cash flow pattern or age support or negates extant

economic predictions of firm life cycle stage

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 This section is to examine whether economic characteristics vary predictably with life cycle

stages as measured by cash flow patterns (Panel A) and by age( Panel B).

TABLE IV
PANEL A: Life cycle stage defined by cash flow patterns
pooled introduction growth mature shake-out decline
n 203 32 35 70 34 32
% of total n 100 15.8 17.2 34.5 16.8 15.8
RNOA -0.727 0.1426 -0.19482857 0.108 -0.68369
PM -0.025 0.04948571 0.038144928 0.028588 0.014375
AT -9.6393 2.86457143 -2.38853623 4.075294 -9.71934
EPS 19.3987 139.633824 100.9271429 129.4497 82.74906
PDIV 0.16667 0.48571429 0.428571429 0.382353 0.28125
AGE 1.1334 1.21457143 1.308 1.305 1.29625
GIS -0.36 -0.01514286 -0.1387971 -0.00785 -0.02469
GNOA -0.208 -0.10137143 0.074171429 -0.125 -0.16688
LEVERAGE 4.5932 -8.14571429 -5.3442029 1.234242 1.157813
DPS 25.957 93.596 396.0385366 85.29235 46.99469
RNOE 4.1403 5.24742857 4.319 5.851765 4.469688
TEBIT -0.782 -0.18294286 -0.38718571 -0.30038 -1.10375
VOPI 829634 1752374.26 1398331.78 500646.8 782055.8
VEPS 204.593 152.950857 143.101 111.0218 109.8813
FCF 38.806 26.8982353 7.308142857 -3.10794 2.42
NWC -0.014 -0.13574286 0.14 -0.02971 0.05
SIZE 6.29375 5.56742857 5.812142857 5.923235 5.684063
Source: researchers’ analysis (2014)

PANEL B: Using Age As A Surrogate

pooled introduction growth mature shake-out decline
N 109 22 22 54 10 1
% of total n 100 20.18 20.18 49.54 9.17 0.92
RNOA 0.06087 0.078696 -0.30552 0.1462 0.39
PM 0.108261 0.028696 -0.19036 -0.02 0.15
AT 1.740043 3.468696 -3.77566 2.458 3
EPS 77.39682 50.09435 69.28333 163.448 930.6
DIV DUM 0.181818 0.409091 0.407407 0.5 1
AGE 0.663478 1.277826 1.496481 1.596 1.67
GIS -0.41652 0.041739 -0.11466 0.079 0.12
GNOA 0.02487 -0.16817 0.106481 -0.038 0.15

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 LEVERAGE 0.661304 0.663043 -8.37245 -2.051 -5.54
DPS 101.465 775.4786 486.0466 241.75 730.2
RNOE 0.427391 6.630435 2.427222 2.927 18.63
TEBIT -0.86286 0.190476 -0.15149 -1.62444 0.31
VOPI 869582 876858.8 1432829 1314258 2458771
VEPS 284.9759 147.6709 130.8731 105.129 154.35
FCF 39.63273 7.374 1.851591 4.608889 0.28
NWC 0.151304 -0.13913 -0.03074 -0.02 -0.17
SIZE 6.536522 6.007826 4.92 6.395 7.54
Source: researchers’ analysis (2014)

Discussion of analysis

In other studies, subjective selections were used, but in this study, the actual ages of the firms were

used to classify the firms into their life cycle stages. The analysis of data elicited for the study to justify

or negate the FLCS, the researchers observed via the literature in Dickinson (2011), economic theory

predicted that profitability is maximised in maturity. In this study’s report in panel A, profitability as

measured by Earnings Per Shares (EPS), Profit Margin (PM) and Return on Net Operating Assets

(RNOA), were maximised in growth firms, while profitability was maximised more in decline firms in

panel B.

Selling and Stickney (1989) as reported by Dickinson (2011), showed that product differentiating firms

focus on research and development, advertising and capacity growth. The effect of such expenditures

is reflected in a higher Profit Margin (PM). The cash flow pattern results in panel A shows a maximum in

the growth (0.05) and mature (0.04) stages, while Panel B reports the maximum in the decline stage

(0.15).

Selling and Stickney (1989) also predicted that matured firms face intensified competition and

operational emphasis shifts to cost reduction and improved capacity utilization. The prediction

translated into high expected asset turnover (AT) ratio in maturity; panel B confirmed this for a mature

firms (i.e. AT= 3.47) while; panel A showed shake-out and growth firms (4.08 and 2.87 respectively) as

maximised AT.

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Growth in sales (GIS) and capital investment (GNOA) should monotonically decrease across life cycle

stages (Spence, 1977, 1979 and 1981). In this study, results showed that, but in panel A and B GIS

and GNOA did not decrease across life cycle stages monotonically. Although, panel A showed

decrease across the life cycle more than the panel B does.

Myers (1984) and Diamond (1991) both predicted that firms are expected to utilize more debt in the

growth stage because of the rate of expansion of business. Panel B supported this assertion with

growth firms having the highest value (0.663). Panel A showed the highest at the introduction stage of

4.593, while the growth firm value is the lowest at -8.146.

Dividends are more likely to be paid by matured firms due to decreased investment opportunities

[Grullon, Michaely, & Swaminathan, (2002); Bulan, Subramanian, & Tanlu, (2007)]. This is justified in

panel A, with mature stage (0.429) as well as the highest dividend per share (DPS) of three hundred

and ninety-six naira and ninety-four naira for mature and growth stages respectively. Panel B showed

that the Decline and Shakeout stages pay a dividend (PDIV) at 100% and 50% respectively while

growth and the decline stage DPS are seven hundred and seventy-five naira and seven hundred and

thirty Kobo respectively. However, Brav, Graham, Harvey and Michaely (2005) survey result suggested

that maintaining the dividend level (or persistent financial policy) is a priority in par with investment

decisions, which is a first-order concern to managers and hence, are consistent with the growth type

view. Panel A has shown that growth stage firms pay the highest dividend (0.486 or 49 %).

Free cash flows are higher for mature firms (Jensen, 1986). This study has shown in both panels A and

B that in Nigeria free cash flows (FCF) is maximised in the introduction stage (at 38.81 and 39.63

respectively).

Finally, size (SIZE) and age (AGE) were reported by Dickinson (2011) to be maximized for mature firms

signifying the nonlinearity of both variables. In this study, panel A showed that size is maximised for

introduction stage while age is maximised for mature firms (6.29b and 1.308 respectively). In panel B,

both size and age are maximized for decline firms (7.54 and 1.67 respectively), which highlighted the

linearity of the age measure.

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 5 FINDINGS, CONCLUSION, AND RECOMMENDATIONS

The Nigerian result of the test of FLCS theory by applying the use of the surrogate from cash flow

patterns is specified here. Unique and critical findings were reported, and the use of italics to

emphasize such is adopted.

Based on the exploratory nature of the study, the researchers sought to determine the Nigerian firms’

patterns. The study found that there is about nine (9) cash flow patterns reported by firms. This is

another unique finding because, the expected possible combinations are eight (8) derived from the fact

that, there are three net cash flow activities (operating, investing and financing) before this finding, it

was known that each type of cash flow activity could take a positive or negative sign, resulting in 23 = 8

possible combinations. However, going by this study’s findings, it has shown that the mathematical

equation has changed because, this study found that each type of cash flow activity could take a

positive, negative or no sign, resulting in 33= 9 possible outcomes.

The main objective was to examine whether the Nigerian firms case will support or negate the FLCS

theory as predicted in the literature usually referred to as economic predictions of FLCS. This study

found that out of about nine of such issues predicted and established in other researchers work; the

Nigerian scenario supported seven out of the nine representing seventy-eight percent (78%) of support

using firms cash flow patterns as a proxy as against the use of firms age as a proxy. Therefore, the

researchers found that: -

- Profitability was maximized in mature/ growth firms using cash flow pattern as a proxy, and it is

consistent with Dickinson (2011) predictions.

- Profit margin a measure of product differentiating firms is maximized in growth/ mature stages

using cash flow proxy, and it is consistent with Dickinson (2011) predictions.

- Mature firms face intensified competition and operational emphasis shifts to cost reduction and

improved capacity utilization but in this study’s result, we found that shakeout firms face intensive

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 competition and operational emphasis shifts to cost reduction and improved capacity utilization

using cash flow pattern as a proxy (AT=4.08). This is not consistent with Selling and Stickney (1989)

and Dickinson (2011) predictions.

- Growth in sales (GIS) and Growth in net operating Assets (GNOA) decrease monotonously

more using cash flow pattern as a proxy and are consistent with (Spence, 1977, 1979 & 1981)

predictions.

- Debts are utilized more in the introduction stage in Nigerian firms (LEV =4.593) while growth

firms were having the lowest (LEV= -8.146) indicating that, in Nigeria, as a company starts its

business it relies more on debts, but as it grows, the emphasis is minimized. This finding is not

consistent with [Myers, (1984); Diamond, (1991)] predictions.

Dividend payout (PDIV) is consistent with [Grullon, Michaely, & Swaminathan, 2002; Bulan,

Subramanian, & Tanlu, 2007; Brav Graham, Harvey, & Michaely, 2005] predictions using the cash

flow pattern as a proxy. Mature stage (0.429) as well as the highest dividend per share (DPS) of

three hundred and ninety-six (396K) Kobo and ninety-four (94K) Kobo for mature and growth stages

respectively.

- Free Cash Flow (FCF) is predicted to be maximized at the mature stage but in Nigeria we

found that FCF is maximised at the introduction stage for both proxies (at 38.81 and 39.63

respectively). This finding is unique because both surrogates used in classifying FLCS

indicated that FCF is maximized in the introduction stage. The implication of this finding is that

it has shown that most companies rely on trading business than manufacturing for sale. Hence,

they endeavor to supply needed goods from the onset thereby, enhancing their free cash flow

at that stage as against the mature stage. This finding is not consistent with Jensen (1986)

predictions of FCF.

- Size is maximized at introduction stage while age is maximized at mature firms (6.29 and 1.308

respectively). In panel B, both size and age are maximized for decline firms (7.54 and 1.67

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 respectively), which highlight the linearity of the age measure. The finding for Age in Panel A is

consistent with Dickinson, (2011) while; the others were not consistent with her predictions.

Based on the results of research, two findings impact on socio-economic indicators of the

nation. Thus, the researchers made the following suggestions on how to manage these findings.

Firstly, the finding ‘FCF is maximized in the introduction stage’ is very important to investors

both local and international. Thus, investors should maximize their wealth at the introduction stage and

at the same time try to maintain that stage for a long time. Recommending that government and

interested investors should intensify interest in industrializing Nigeria so as to enable the country to

experience the growth experienced in other industrialized nations.

Secondly, the finding ‘shakeout firms face intensive competition and operational emphasis

shifts to cost reduction and improved capacity utilization using cash flow pattern as a proxy (AT=4.08)’,

poses a challenge to firms in Nigeria. The study recommended that firms should endeavour to start

laying emphasis on cost reduction schemes, competition, and improved capacity utilization at the

introduction stage and intensified efforts even more in growth and mature stages to remain relevant in

business.

In concluding therefore, cash flow patterns as a surrogate for FLCS measure is more consistent with

extant economic theory. The researchers also found that Nigerian business environment is structurally

different from most other researchers who have conducted researches in this area because they are

basically from industrialised nations while Nigeria is not so industrialised. In that case, the study’s

research finding stated that free cash flow is maximised at the introduction stage of a firm has an

economic and commercial impact in practice. Also, past researchers showed that competition and

operational efficiency were increased at the mature stage that is attracted to the product market by

superior profits. However in this study, competition and operational efficiency are on the increase in the

shakeout stage, and this is not attracted to the product market by superior profits rather, it is attracted

to the product market by challenges encountered. Therefore, this study contributed to the body of

knowledge by including Nigerian companies’ evidence in the literature.

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This study helped to bridge the gap between theory and practice by bringing to the fore that cash flow

patterns can be used to classify company into its life cycle stage. By extension, investors, researchers,

and regulators will from this study’s finding know how to consider the life cycle stage of a company or

companies into their decision taking considerations. We recommended that further study on life cycle

should be done to ascertain whether investors consider the life cycle stage of companies before

investing. Also, it will be interesting to find the survivor trend, and developmental stages of companies

in Nigeria considering their life cycle stages over some periods of time.

20
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