The Mortality Of Publicly Traded Companies
Madeleine I. G. Daepp
Santa Fe Institute, Santa Fe, NM, USA
Integrated Studies in Land and Food Systems, University of British Columbia, Vancouver, British Columbia, Canada
Marcus J. Hamilton
Santa Fe Institute, Santa Fe, NM, USA
School of Human Evolution and Social Change, Arizona State University, Tempe, AZ, USA
Geoffrey B. West
Santa Fe Institute, Santa Fe, NM, USA
Department of Mathematics, Imperial College London, London, UK
Luís M. A. Bettencourt
Department of Mathematics, Imperial College London, London, UK
Abstract
The firm is a fundamental economic unit of contemporary human societies. Studies on the general quantitative and statistical character of firms have produced mixed results regarding their lifespans and mortality. We examine a comprehensive database of more than 25 000 publicly traded North American companies, from 1950 to 2009, to derive the statistics of firm lifespans. Based on detailed survival analysis, we show that the mortality of publicly traded companies manifests an approximately constant hazard rate over long periods of observation. This regularity indicates that mortality rates are independent of a company’s age. We show that the typical half-life of a publicly traded company is about a decade, regardless of business sector. Our results shed new light on the dynamics of births and deaths of publicly traded companies and identify some of the necessary ingredients of a general theory of firms.
The Mortality Of Publicly Traded Companies
Publicly traded companies are among the most important economic units of contemporary human societies [1–6]. As of 2011, the total market capitalization of firms in the New York Stock Exchange was 14.24 trillion dollars, comparable to the entire gross domestic product of the USA. While researchers have devoted considerable attention to the distribution of firm size [7–11], the distribution of firm lifespan has been the subject of far fewer studies [12]. Thus, despite the availability of much quantitative information, our understanding of the way public companies live and die remains limited.
At present, there are several arguments addressing the statistics of company lifespans that have led researchers to a range of different conclusions. Some of these considerations hinge on the interpretation of the meaning of the death event for a company. In the framework of this paper, definitions of ‘birth’ and ‘death’ are based on the sales reports available in the Compustat database; details can be found in §4. While liquidation is often responsible for firm deaths, a much more common cause of death relates to the disappearance of companies through mergers and acquisitions. Thus, in our definition, firms may ‘die’ through a variety of processes: they may split, merge or liquidate as economic and technological conditions change. This raises the question of what characteristics of firms may initiate such events. In particular, it has often been suggested that the mortality rates of firms are age-dependent [5,13–16], a proposition that offers significant insight into the forces that determine firm survival. We address this question using a comprehensive database of over 25 000 publicly traded North American companies covering a large spectrum of business sectors over the period 1950–2009. The present analysis provides one of the largest studies of this kind [5,6], both in terms of numbers of firms and timespan.
There is a great diversity of perspectives on a theory of the firm, focusing on different aspects of their costs, organization and evolution. In modern economic theory, the existence and boundaries of firms are understood in counterpoint to the dynamics of self-organization in markets. Economists such as Coase [3,17,18] and Williamson [19,20] proposed that firms exist in order to minimize (positive) market transaction costs involved in the production of goods and services. In situations when, for example, there is particular specificity of goods and services exchanged between two economic agents, such transactions may be best organized internally to an organization rather than negotiated in the open market [2,20–24]. As such, firms may split, merge or liquidate in response to economic agents evolving new and better ways of dealing with the various costs and revenues of production and exchange [21–24]. Therefore, at least on the average, the merger of existing companies should be approximately neutral in terms of the balance between costs and benefits [21–24]. However, this relatively simple picture becomes more complex in the light of behavioural studies of the impact of decisionmaking and management practices on the growth and viability of actual firms [25,26].
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