1 INTRODUCTION

1.1 Background and motivation

The concept of life cycle stages of the firm is not new to the literature on
finance and accounting. Haire (1959) is considered among the pioneers
to suggest that firms may adhere to some uniform pattern in their course
of expansion, while, Chandler (1962) proposed that organizations had a
life and that technological and market forces play a major role to set
limits on firm growth. Subsequently, numerous studies such as;
(Abernathy, 1976; Adizes, 1990; Anthony & Ramesh, 1992; DeAngelo,
DeAngelo, & Stulz, 2006; Dickinson, 2011; Dodge, Fullerton, &
Robbins, 1994; Flamholtz, 1986; Gaibraith, 1982; Hanks, Watson,
Jansen, & Chandler, 1993; Jawahar & McLaughlin, 2001; Kimberly,
1980; D. L. Lester & Parnell, 2008; D. L. Lester, Parnell, & Carraher,
2003; Miller & Friesen, 1984; Mintzberg, 1973; Quinn & Cameron,
1983) had proposed different life cycle models by applying a diverse
array of measures such as, organizational situation, leadership style,
strategic orientation, decision-making responsibility, critical
development areas, age of the firm, dividend payout policy and cash
flows to determine each stage of development. Although the number of
stages suggested for the life cycle models varies from three (K. G.
Smith, Mitchell, & Summer, 1985) to ten (Adizes, 1990) stages, all
models divulge similar pattern of development. Models with more
development stages classify general stages to specific periods, whereas
models having fewer development stages integrate two or more stages to
attain more parsimonious stages (D. L. Lester et al., 2003). Corporate
life cycle theory propose that firms pass through a series of foreseeable
development phases and that the strategies and structures of the firm
vary significantly with the change in corresponding development phase
(Gray & Ariss, 1985; Miller & Friesen, 1980, 1984; Quinn & Cameron,
1983).
Studies on firm risk taking suggest that it plays a fundamental role in
firm growth, performance and survival (Bromiley, 1991). However,
corporate risk taking is a broad term that can further classify into
numerous types of risk such as operational risk, equity risk, insolvency
risk, investment risk and many more. Though, all sorts of risk can play
an important role in the evolution of a firm but after the recent credit
crunch of 2007-08 bankruptcy risk has become an actual subject in the
academic literature on finance (Oude Avenhuis, 2013). Bankruptcy or
insolvency risk refers to a state of business when a firm face difficulties
with paying its debt obligations and if this state of financial stress
prolonged, it will lead to insolvency.
Firm life cycle and bankruptcy risk have received substantial research
interest both from academic researchers and financial analysts in the
contemporary corporate finance, economics and accounting literature.
Existing literature on firm life cycle reveals that firms are like living
organisms, evolve through presuppose series of stages sequentially from
birth to decline (Adizes, 2004; Miller & Friesen, 1980, 1984; Pashley &
Philippatos, 1990; Quinn & Cameron, 1983) and that the strategies,
structures, capabilities and resources of the firm vary meaningfully with
the change in corresponding development phase (Gray & Ariss, 1985;
Miller & Friesen, 1980, 1984; Quinn & Cameron, 1983). Studies on firm
life cycle also suggest that firm life cycle stage has a strong impact on its
operating performance (Warusawitharana, 2014), financing (Berger &
Udell, 1998), investment (Richardson, 2006) and dividend payment
decisions (DeAngelo et al., 2006; Fama & French, 2001; Grullon,
Michaely, & Swaminathan, 2002). Literature on bankruptcy risk
predominately focus on the construction of models that may predict the
probability of firms to file for bankruptcy. Others reveals that insolvency
risk has a significant relationship with firm investment decisions (Rose-
Ackerman, 1991), stock returns (Dichev, 1998), bond returns (E.
Altman, 1993), productivity (Chang, Ehsan Feroz, Bryan, Dinesh
Fernando, & Tripathy, 2013), dividend payment (DeAngelo &
DeAngelo, 1990) and operational restructuring (Sudarsanam & Lai,
2001).
Moreover, Literature on corporate risk taking and firm performance
yielded inconsistent outcomes. Armour and Teece (1978) and Fisher and
Hall (1969) argues that most of the firms are risk-averse, and these risk-
averse firms do not tend to assume high risk unless it delivers a
considerable expected future returns. Aaker and Jacobson (1987) found
a positive relationship between risk and firm performance. Fiegenbaum
and Thomas (1985) found that some industries have positive relationship
between risk taking and performance, while others have negative
relationship. On the contrary, Bowman (1980, 1982) and Treacy (1980)
found a negative association between risk taking and performance,
mainly for below-average performance firms. Following his prior
research Bowman (1984) explored a positive association between risk
and return for the 1965 to 1969 time period while, 1970 to 1979 period
showed to have a strong negative association for risk- return paradox.
Following these conflicting outcomes, we argue that firm life cycle
model may help to explain these indecisive outcomes.
A long search of literature could find only a single study that examines
the relationship between firm life cycle stages its risk taking propensity
and future performance see, (Habib & Hasan, 2015). Study uses
investment risk, equity risk and overall risk measures to check the
proposed relationship. However, the association between bankruptcy
risk propensity and corporate life cycle stages and the effects of this risk
taking on current and future performance of a firm remains totally
unexplored in the literature.
Thus, the importance of these strands of literature, dearth of empirical
evidence and recent advancements in development of appropriate
constructs for firm life cycle motivated us to explore the relationship
between these distinct aspects of corporate finance and management.

1.2 Brief literature review

1.2.1 Corporate life cycle model and its measurement
Corporate life cycle model propose that firms pass through a series of
foreseeable development phases and that the strategies and structures of
the firm vary significantly with the change in corresponding
development phase (Gray & Ariss, 1985; Miller & Friesen, 1980, 1984;
Quinn & Cameron, 1983).
There appears to be no consensus on the definition that could be used to
differentiate the firm life cycle stages (Jaafar & Halim, 2016). In
literature, a wide range of life cycle models have been proposed by the
researchers. These multi-stage models have used numerous measures
such as organizational decision making responsibility, strategic
orientation, leadership style, age, cash flows, critical development areas
and retained earnings to define each stage of firm life cycle. The number
of stages suggested for the life-cycle models ranges from three to ten
stages: three-stage (K. G. Smith et al., 1985), four-stage (Pashley &
Philippatos, 1990), five-stage (Dickinson, 2011; Miller & Friesen,
1984), six-stage (Adizes, 1979) and ten-stage model (Adizes, 1990).
Models with more development stages classify general stages to specific
periods, whereas models having fewer development stages integrate two
or more stages to attain more parsimonious stages (D. L. Lester et al.,
2003). Following are some measures of firm life cycle proposed by
different scholars in different time periods; Lippitt and Schmidt (1967),
and Downs (1967) are considered among pioneers who suggested
different stages to the life cycle model. Both suggested a three-stage
model. Lippitt and Schmidt (1967) model have birth, youth and maturity
stages while, Downs (1967) model is consist of genesis, growth and
death stage of firm life cycle. However, the major drawback of these
studies was that they were developed conceptually without performing
any empirical analysis. Authors theoretically specifies certain attributes
to different stages.
Greinar (1972) proposes a five-stage (creativity, direction, delegation,
coordination & collaboration) growth model of firm life cycle. Study
theorizes that at creativity or birth stage founder emphasis on creating a
new product and marketplace. The companies that survive the first stage
by hiring capable staff enters in the next stage of direction that is usually
known as a period of sustained growth with decentralized management.
Firms that successfully apply decentralization approach at direction
stage starts their next era of delegation. During this phase greater
responsibility is delegated to the lower managers and top level
management focus on periodic reports. Coordination stage is also known
as red tape, a stage full of formal planning and procedures that takes
priority over problem solving and innovation. Final stage collaboration
is actually a solution to survive from coordination phase. Firms that
apply a flexible management approach, focus on solving problems
through team work and simplified their control systems are characterized
under collaboration stage. Study of Greinar (1972) introduces a more
comprehensive model of life cycle with an indication that each stage
could be the last stage of a firm if it does not adopt certain strategies.
However, like past studies this was also a theoretical work.
Adizes (1979) developed a six-stage (courtship stage, infant organization
stage, Go-Go organization stage, adolescent stage, prime stage &
maturity stage) model of firm life cycle. Study argues that firm life cycle
stage change with a change in management emphases on following four
activities: Acting entrepreneurially, administering formal rules and
procedures, producing results, integrating individuals into the firm.
Though, this model is also of theoretical nature with no empirical
analysis. However, the only distinguish characteristic it holds is that it
elucidate the decline stage of firm life cycle which was ignored in
previous studies.
Miller and Friesen (1984) proposed a pioneering model that have used
statistical techniques to divide firms into five (birth, growth, maturity,
revival & decline) different stages of life cycle. Miller and Friesen
(1984) employed past hypothetical literature to develop a rough
theoretical typology of the stages of firm life cycle. Five basic life cycle
stages that were commonly suggested in the literature were included in
the analysis. 54 different attributes related to firm strategy, structure,
decision making and environment were assigned to 36 firms that were
categorized into five varying life cycle stages over a sample of 161
periods. Analysis of variance were applied on the sample. Results
reveals that strategies, structure and decision making vary with a change
in firm life cycle stage and that firms do not follow a sequential pattern
of life cycle.
For the first time, Pashley and Philippatos (1990) uses financial ratios to
divide firms into different life cycle stages. They argued that six
financial characteristic such as market power, sales- generating ability,
operating profitability, dividend payment policy, liquidity and financial
leverage vary with a change in firm life cycle stage. 18 financial ratios
were selected among them four ratios were used to measure market
power. To measure liquidity, financial leverage and profitability, three
ratios were assigned to each financial characteristic. While, to quantify
dividend payment policy and sales-generating ability two ratios were
assigned individually. Maximum likelihood factor analysis and many
other analysis were performed with Varimax rotation. Four well defined
factors; profitability; liquidity; financial leverage; and market power that
explained 88% of the variance were selected. Afterwards, six cluster
analysis were performed to group the firms into different stages of life
cycle. First cluster is identified as early maturity or transition from
growth to maturity stage. Firms consist of this cluster tend to have high
profitability, debt, market power and liquidity. While, low-medium sales
generating ability with moderate dividends. Second cluster is labeled as
late maturity or early decline. The firms in this cluster pay high
dividends, have medium-high profitability and low level of debt. At this
level sales level starts to drop thus low to medium sales generating
ability was identified. Third cluster is identified as regenerating maturity
stage of life cycle. Firm at this stage tend to have the highest sales
generating ability, lower dividend payout, low-medium liquidity, high-
medium leverage, low profitability and low market share. Final cluster is
named as decline. These firms’ show lowest liquidity, low dividends,
and low profitability while debt levels with medium magnitude. This
was the first study which empirically proves that financial attributes of a
firm can be used to classify the stage of its life cycle. However study
fails to identify introduction and early growth stage firms. Anthony and
Ramesh (1992) proposed a more comprehensive four-stage (birth,
growth, maturity and decline) model of firm life cycle. It is a widely
used life cycle measure in the literature. Annual dividends, income, sales
growth, firm age and capital expenditures as a proportion of firm value
were used to develop a life cycle model. The methodology is as below;
i. (annual dividends/income before extraordinary items and discontinued
items) * 100

ii. Sales growth = ( sales scaled by lagged sales) * 100

iii. (Capital expenditures / market value of equity + book value of

debt) * 100

iv. Age = number of years firm incorporated

After calculating these life cycle measure descriptions for each year and
firm individually. Anthony and Ramesh (1992) compute median values
of these descriptors for each firm-year using data of current year and
four previous years. Afterwards, Fama and French’s 49 industry
grouping was used to split the median values (for each industry) into
quartiles and each firm-year is assigned by a life cycle category. Finally,
firms can be divided into life cycle stages based on cut-off values of
each quartile.
DeAngelo et al., (2006) proposed a firm life cycle theory of dividends.
Empirical findings of the study reveals that firms with large retained
earnings scaled by total assets ratio tend to be mature with high profits.
While, low RE/TA ratio exhibits that firms are at growth stage because
these firms have more profitable opportunities thus they will not retain
profits. Moreover, mature firms prefer to pay dividends whereas,
growing firms plough back their profits.
D. L. Lester and Parnell (2008) developed a five-stage (existence,
survival, success, renewal & decline) Model. They questioned that, if
firm life cycle model is adopted from biological science, then why do
some firms renew themselves (Hurst, Rush, & White, 1989; D. Lester &
Parnell, 1999) and some do not follow a sequential pattern of life cycle?
To address this question five dimensions of a business strategy such as;
business structure, specialization, decision making, information
processing and participation were tested in a survey based study.
Respondents were consist of 107 middle level and upper level managers
in small, medium and large size firms of southeastern United States. A
25-item scale referring to 5 dimensions of business strategy was used to
test five stages of life cycle i.e., existence, survival, success, renewal and
decline sequentially. Findings of the study were as follow;

Uniqueness of the study of D. L. Lester and Parnell (2008) is that it also

suggested a life cycle pattern for small size firms. Bold arrows in the
above diagram show the life cycle pattern of small scale firms. It
exhibits that because of their small size these firms never enters into the
phase of success (maturity) or renewal as these stages are characterized
for large firms with wide markets. In the case of large size firms they
mostly found in survival, success and renewal stages. Moreover, success
or mature firms can escape themselves from the declining stage if they
work collaboratively on innovation and productivity and delegate some
authority to middle and lower level managers.
Dickinson (2011) introduced a parsimonious measure of firm life cycle
stages by using data from firms’ cash-flow statements. She posits that
cash flow statements of a firm capture differences in its profitability, risk
and growth. Thus, we can use cash from operating, investing and
financing activities to segregate firms into introduction, growth,
maturity, shake-out, and decline stages of life cycle. This classification
of life-cycle stages combines the implications of various research areas
of economic literature like; entry/exit patterns (Caves, 1998),
learning/experience (Spence, 1981), production behavior (Spence, 1977,
1979, 1981; Wernerfelt, 1985), investment (Jovanovic, 1982; Spence,
1977, 1979; Wernerfelt, 1985) and market share (Wernerfelt, 1985).
Moreover, she argues that cash-flow measure of firm life cycle stages
enables us to apprehend non-sequential transition of stages that cannot
be captured using prior sequential proxies.
The methodology founded on the following cash flow pattern;
Introduction, if CFO < 0, CFI < 0, and CFF > 0;
Growth, if CFO > 0, CFI < 0, and CFF > 0;
Mature, if CFO > 0, CFI < 0, and CFF < 0;
Decline, if CFO < 0, CFI > 0, and CFF≤ or ≥0;
Shake-out: rest of the firms will be considered under shake-out stage.
Yazdanfar and Öhman (2014) suggested a six-stage life cycle model
particularly for small and medium sized firms. They provide probably
the simplest model to measure firm life cycle stage. Firm age was used
to classify it in any of six stages. Model considered an interval of five
years ranging from 1 to 25 years to group the firms in different stages.
Firms older than 25 years were categorized in final or sixth stage of life
cycle.
Jaafar and Halim (2016) presented a three-stage (growth, mature &
decline) measure of firm life cycle. They used three variables: market to
book value of assets ratio, percentage of sales growth and capital
expenditure to property ratio to classify firms in different stages of life
cycle. These selected proxy variables reflect economic attributes, sales
generating ability and organizational change of firms. These variables
were calculated as follows;
i. Market to book value of assets ratio = [(number of ordinary shares
outstanding) * (Share price) + total debt – Cash] / book value of
assets

ii. Percentage of sales growth = (current year sales – previous year

sales) / previous year sales

iii. Capital expenditure to property ratio = Capital expenditures / book

value of net property, plant and equipment

After individually calculating these ratios for sampled firms and years
they measure industry quintile for each firm-year and assign scores to
the life cycle proxies for every year according to the industries quintile
segregation. Finally, composite scores were calculated for all the firms
in every year and a life cycle stage was assigned on the basis these
scores.
Though, this study did not use ‘firm age’ variable to calculate life cycle
stage in a view that age proposes a sequential life cycle model that
actually does not exist. But still, the major drawback of this study is the
exclusion of birth or introduction stage of firm life cycle.
Besides the life cycle measure mentioned above, in literature numerous
other models are available but the common problem with these measures
is that either they are theoretical or survey based. Very few studies have
provided empirical evidences to measure different stages of firm life
cycle. Among these empirically tested models, majority of researchers
have employed firm-specific variables such as firm age, sales growth,
dividend payout policy and size to divide an organization into different
stages of life cycle. However, this practice yielded sequential or non-
cyclical life cycle models that are widely criticized in the literature
because of their inapplicability in the real world. To overcome this issue,
study have uses cash flows based proxy of life cycle.
1.2.2 Why a cash flows based measure of life cycle?
In corporate life cycle literature, numerous measures are proposed to
attribute the different stages of firm life cycle, including firm age,
growth, size, strategies, financial position, decision making and
controllability. The classification of life cycle stages apprehends the
changes in firm growth and the flexibility of firms towards the
competitive environment (Bulan & Yan, 2009). Moreover, a wide range
of studies suggest that firm life cycle do not follow a sequential pattern
see e.g., (D. Lester & Parnell, 1999; D. L. Lester et al., 2003; Miller &
Friesen, 1984; Tichy, 1980). One possible reason of this non-sequential
life cycle pattern is the theory of strategic choice (Child, 1972). It
postulates that corporate managers who identify the need for a strategic
change in their corporations to attain long term competitiveness may
also identify the need to change other organizational dynamics that
determine firm life cycle (D. L. Lester & Parnell, 2008). While,
theoretical models of life cycle measure generally proposes a fairly
structured and difficult to reverse sequence of stages, developing from
birth to growth to success to either shake-out or decline see e.g.,
(Adizes, 1990; Greinar, 1972; Quinn & Cameron, 1983). Moreover,
most of the empirical measures of life cycle stages use firm age, growth
and size which are also sequential measures (Khan & Watts, 2009).
These models assume that organizations develops sequentially through-
out their life cycle while ignoring the fact that the nature of life cycle
can be non- sequential (Amit & Schoemaker, 1993). Many
organizational growth measures focusing on variations in internal and
external dynamics predict that firms in their lifetime have limited
number of distinct stages. Certainly, these corporate life cycle measures
have been denounced because of their linear nature and unsuitability in
the real world (Levie & Lichtenstein, 2010). Dickinson (2011, p. 1974)
postulates that “a firm is a portfolio of multiple products, each
potentially at a different product life cycle stage.” While, Entrants into
new markets, ample product innovations and operational variations
could also provide a root to non-sequential changes in firm life cycle
stages. Thus, Dickinson (2011) suggests a cyclical measure of life cycle
stages based on cash flow patterns of a firm. As compared to traditional
life cycle models, the cash flow patterns based model have two key
benefits. Firstly, it reflects the entire financial information of the
company rather than being a single measure of firm related attributes
(e.g. firm age, sales growth, size, strategies and flexibility). Secondly, it
is cyclical in nature and indicates true state of business cycle. Therefore,
cash flow patterns proxy is considered to be a better measure of
corporate life cycle stages. By examining the possible outcomes of cash
flows from operating, investing and financing activities (Dickinson,
2011) partitioned firm life cycle into five stages: introduction, growth,
maturity, shake-out and decline.

1.3 Objectives of the study

The Study is embark to accomplish following objectives;
i. This study aims to discover that how bankruptcy risk weights of a firm
changes over different stages of its life cycle in Pakistani non-
financial listed firms and also that whether risk taking in a
particular stage will generate positive or negative future cash
flows. Moreover, incremental effects of market sentiments if any,
on the relationship between corporate life cycle stages and
bankruptcy risk will be examined. These statistics shall provide
valuable insights to the investors about the financial decision
making of Pakistani listed firms. It could also help the managers to
make a comparative analysis about the risk and return paradox at
different stages of corporate life cycle and formulate their policies
accordingly.

ii. Study also attempts to identify that whether firm working capital
levels and policies changes with a change in its life cycle stage, if
yes, then how it effects the profitability of the firm. Statistics about
working capital management and policies will reveal some
interesting facts about the short term assets and liabilities
management in Pakistani firms. Once study determined varying
effects of WCM and policies on firm profitability at different
stages of its life cycle, these evidences will provide new measures
and guidelines to the policy makers about managing their working
capital in an optimal way across firm life cycle. Moreover, it will
 also provide a good overview about WCM and policies to the
stakeholders.

iii. The literature on corporate life cycle predominately focus that how
investment, financing and dividend payment decisions of a firm
changes over its life cycle, the main objective of this study is to
examine that how bankruptcy risk weights vary over firm life cycle
and that how this risk taking will affect the current and future
performance of sampled firms at each stage of their life cycle.
Thus, findings of this study might provide useful information to
the managers of Pakistani listed firms in particular and to that of
the developing economies in general about the role of firm life
cycle stages in firm risk-taking and performance relationship.

iv. This study is developed on the work of Habib and Hasan (2015) to
contribute new evidences in the existing literature. By using a
sample of all non-financial firms on the Compustat fundamentals
annual file, they argued that firm equity, investment and overall
risk taking vary over its life cycle stages and also the relationship
between risk and future performance is not uniform across
different stages of FLC. However, the uniqueness of present study
lies under the fact that, to check proposed relationship it uses a
different type of risk (i.e., Bankruptcy risk) which was not tested
before in the literature. Moreover, study is extended by examining
the proposition that firms at different stages of life cycle needs
varying working capital levels and strategies to optimize their
profitability.

1.4 Contribution of the study

In the context of Pakistan, there is a substantial prior literature drawing
from the agency theories on the relationship between corporate
governance and firm risk taking, see e.g., (Abdullah, Shah, & Khan,
2012; Alam & Ali Shah, 2013; Shah, Kouser, Aamir, & Hussain, 2012).
However, the focus on corporate governance and its structure overlooks
the role of firm life cycle stages that can play a vital role in determining
firm bankruptcy risk propensity. This study is an attempt to fill this void
and make contribution to the literature of finance in several ways;
First, this thesis contributes to the literature on emerging economies and
corporate finance by examining the influence of firm life cycle stages
and investor sentiment on bankruptcy risk behavior of Pakistani listed
firms. While prior literature in this setting employed different types of
risk and takes a general approach by including both emerging and
developed economies as a whole. Hence, it deepens our knowledge that
specifically in emerging economies, such as Pakistan, how bankruptcy
risk weights change over firm life cycle.
Second, study has examined the effects of bankruptcy risk at different
life cycle stages on current and future performance of a firm, findings of
this chapter will help the managers in at least two ways. First, by
providing them some guidelines and diagnostic tools to manage and
utilize their resources in an optimal way to reach and retain the foremost
stage of life cycle. Second, by understanding the insights about decision
making at different life cycle stages managers can outperform their peers
by taking right decisions at the right time.
Third, study extends the market sentiments literature by examining its
effects on insolvency risk of sampled firms over their life cycle. While
prior literature investigates the role of market sentiment in calculating
market volatility and stock returns see e.g., (Brown, 1999;
FisherKenneth, 2000; W. Y. Lee, Jiang, & Indro, 2002; Meijin &
Jianjun, 2004). Little attention has been paid to the role of market
sentiment in determining firm bankruptcy risk propensity. By
understanding this relationship investors can get valuable insights about
investment decision making of firms. Hence, it will also help them in
managing their investment portfolio.
Fourth, by examining the role of firm life cycle stages on the
relationship between working capital (management & strategy) and firm
profitability, present study have provided a new dimension to the
financial decision makers which will help them in the process of
selecting a suitable WCM strategy. Moreover, this study also have
useful implications for short-term financial lenders as they might restrain
themselves from lending to an introduction and decline firm that has
adopted a conservative WCM strategy.
Fifth, study also contributes to the literature on macroeconomics by
examining the effects of country-level economic (GDP growth,
industrial growth and inflation) variables on firm risk taking at different
life-cycle stages. It will help the policy-makers of national and
multinational firms to draft their policies in accordance with the
economic situations of the country in order to succeed in a competitive
business environment.
Finally, given the absence of literature on firm life cycle theory and
bankruptcy risk propensity, a comprehensive empirical study is needed
and timely.
1.4.1 Innovation of the study
The foremost innovations of the study are described below;
i. The study is first of its type from the Pakistan which divided the
listed firms into different stages of life cycle using a newly
developed cash flows based cyclical measure of corporate life
cycle. It depicts that Pakistani firms do not follow a sequential
pattern in their life cycle rather they have the ability to revert to
a previous stage or jumps to a next stage of life cycle. This will
motivate the managers of mature and decline firms that their
firm is not going to dead instead, they can again move towards
the stage of growth by innovation and awarding more decision
making power to middle and lower level managers.
ii. Present work sheds light on the investment behavior of financial
managers and incorporates that managers of the firms operating
at various stages of business life cycle respond differently to
 market wide high sentiments. Furthermore, investors’
sentiments have varying effects on firm bankruptcy risk across
its life cycle.
iii. Owing to the extensive debate in the extant literature on risk-
return puzzle. The findings of this study provides a new
dimension of firm life cycle stages that can play a role in
resolving this puzzle.
iv. The study makes pioneering contribution to the literature by
associating corporate life cycle theory with working capital
management and policies. It reveals that managers of Pakistani
listed firms are managing their working capital in an
inappropriate way that is lowering the profitability of
introduction and decline firms.
1.4.2 Conceptual framework
The following conceptual framework is employed to achieve empirical
and theoretical objectives of the study. The framework clearly indicates
the associations between firm life cycle stages and bankruptcy risk and
performance as well as the relationship between risk and future
performance. It also specifies the channels through which these
relationships exists. The hypothesis mentioned in the figure are
discussed in the relevant chapters of the study.
1.5 Theoretical support of firm life cycle
Corporate life cycle models have mainly benefitted from theoretical
contribution of (J. Barney, 1991). A brief description of the theory that
provide support to firm life cycle models is given below;
1.5.1 Resource base theory
The resource based theory of J. Barney (1991) describes that resources
and capabilities are imperfectly mobile and are heterogeneously
dispersed among organizations. This difference in resource controls
across organizations over time allows them to establish and maintain a
resource- based competitive advantage. Dynamic resource base view
includes the inauguration, development and maturity of capabilities of a
firm and thereby proposes that competitive advantages and
disadvantages in the shape of resources and capabilities changes over
time in indispensable ways (Helfat & Peteraf, 2003). Hence, the
evolution of an organization’s competitiveness in terms of its resource-
based is the underpinning of firm life cycle.

1.6 Thesis structure and summary of findings

This thesis is structured around four different but interrelated aspects of
corporate finance which are corporate life cycle, bankruptcy risk
propensity, firm performance and working capital management. As a
whole, the thesis is organized in nine chapters including this chapter.
The rest of the study is organized as follows:

Chapter 2 demonstrates the sample and data selection, sources of data

and their reliability, selection and measurement of variables. This
chapter also elaborates the research design and proceedings, modes and
methodologies that are employed to conduct this research. The chapter is
divided into four major parts. First part provides an overview of the
financial and non-financial sector of Pakistan. Second part discusses the
selection of sample and the sources from where the data on dependent,
independent and control variables is extracted for empirical analysis. It
shows the industry-wise and year-wise division of sampled data. This
part also indicates the percentage of firms that are segregated into
introduction, growth, mature, shake-out and decline stages of life cycle
using (Dickinson, 2011) model. Moreover, by using E. I. Altman (1968)
and Zmijewski (1984) models of bankruptcy risk, it shows the year-wise
number of firms that are facing high and low levels of bankruptcy risk.
The third part of this chapter provides the details about the
measurements of explanatory, dependent and control variables of the
study. It has divided the control variables into three categories i.e., firm
level, industry level and country level controls. On industry level,
industry competition/concentration is controlled using Herfindhal index
and sampled industries are segregated into different market structures
such as perfect competition, monopolistic completion and oligopolistic
completion on the basis of their HHI values. In the final section,
research design and the proceeding modes and methodology to be
applied on the sampled data to examine the proposed relationships are
elaborated.
Chapter 3 provides detailed descriptive analysis for the dependent,
independent and control variables of this study. In the first step mean,
median, standard deviation and life cycle wise average (arithmetic
mean) values of all the selected variable are calculated. In the next step,
life cycle-wise correlation among dependent, independent and control
variables is examined. The final section discusses the pair-wise
correlation analysis.
Chapter 4 studies the association between firm life-cycle stages and its
bankruptcy risk propensity. Existing literature on risk taking propensity
show that risk taking is affected by a number of variables such as; CEO
compensation, corporate reputation, use of credit default swaps,
employee inside debt, institutional equity ownership structure and
national culture of the country while, strategic management literature
proposes that firms pass through different stages of life cycle and their
resources, capabilities, strategies and decision making styles vary
meaningfully with the change in their life cycle stage. Hence, it is
argued that insolvency risk propensity may also respond to the change in
firm life-cycle stage. For this purpose, first part of the chapter provides
an introduction of the topic, second part discusses the past literature and
present the testable hypothesis. Third section presents data and
methodology while, in the fourth section results of empirical analysis are
reported. Evidence in this section shows that managers of a firm assume
more risk during the introduction, growth, and decline stages while, less
or no risk during the mature stage of its life-cycle. The results also
suggest that, as compare to the growth stage of life-cycle, bankruptcy
risk propensity of a firm will be high during the introduction stage. As a
whole, these results document a significant impact of firm-life cycle
stage on its insolvency risk.
Chapter 5 discusses the results about the second hypothesis of this thesis
that examines the incremental effects of market sentiments on the firm
life cycle and bankruptcy risk relationship. An extensive body of
literature argues that market sentiments play an important role in firm’s
decision making regarding, equity issuance, investments and dividend
initiation. Therefore, study posits that as firm life-cycle has a significant
association with its insolvency risk propensity, this relationship should
also have implications for the market-wide sentiments. First and second
section of this chapter provides introduction to the topic, discuss relevant
literature and develop hypothesis for empirical testation. Data and
methodology are presented in the third section while, fourth section have
reported the findings of the empirical analysis. This section finds that
overall firms’ tend to take more risk during the period of high market
sentiments. However, life cycle-wise statistics reveals that firms will
assume more risk during introduction and decline stage of their life cycle
if market sentiments are high while, their risk taking propensity will not
be affected by sentiments during the mature stage of life-cycle as they
continue to be risk-averse at this stage. It is fascinating to note that,
although risk-taking during high investor sentiment period goes up, no
evidence is found that bankruptcy risk will decrease during the period of
low market sentiments.
Chapter 6 describe the results about third hypothesis of the thesis, which
observes the association between bankruptcy risk and firm current and
future performance conditional on life cycle stage. Extant studies
suggest that performance of a firm does not remain uniform across its
life cycle stages. Thus, it is argued that bankruptcy risk at different
stages of life cycle may yield varying future outcomes. This chapter
starts with an introduction to the topic, presents past relevant literature
and hypothesis to be tested. Data, Variables and methodology are
explained in subsequent section. The final section provides the empirical
results about the proposed relationship. Evidences suggest that overall
bankruptcy risk have a negative association with firm current and future
performance. However, bankruptcy risk at introduction and growth
stages of life cycle will yield positive performance while, association
between risk taking and current and future performance is found to be
negative for mature and decline firms.
Chapter 7 Examines the role of firm life cycle stages on the relationship
between working capital management and firm performance. Wide array
of literature postulate that firm capital requirements vary with a change
in its life cycle and that organizations at different stages of their life
cycle differ in the ability to raise external finance. Therefore, study
claimed that firm life cycle stage might have an effect on the
relationship between WCM and firm profitability. The contents of this
chapter consist of introduction, literature review, data and methodology
and empirical analysis sections respectively. Results of the chapter
proved that working capital management have a negative relationship
with the profitability of introduction, growth and decline firms. But, as
compare to growth stage, this relationship is more sensitive for
introduction firms. Furthermore, WCM does not have any significant
relationship with the profitability of mature firms.
Chapter 8 described the results of fifth hypothesis which posits that
corporate managers should consider firm life cycle stage as an important
factor while choosing a WCM strategy to maximize the profitability of
their organization. First section of this chapter provides an introduction,
second consist of relevant literature and testable hypothesis, third
presents data and methodology while empirical analysis are performed
in the fourth section. Evidences describe that conservative WCM
strategy have a negative relationship with firm profitability during
introduction, growth and decline stages of firm life cycle indicating that
during these phases of life cycle managers should choose aggressive
WCM strategy to increase the profitability of the firm. These findings
also provide support to the results of chapter 7.
Chapter 9 provides a summary of major findings that are extracted from
the empirical analysis of the thesis, and documents the concluding
remarks. In addition, it also discuss policy implications and future
directions of the research. A brief summary of the empirical findings of
this thesis is provided below.