TITLE:
Age of Firms: Irrelevance Proposition
AUTHORS:
Gautam Vora
KEYWORDS:
Firm Age, Control Variable, Fixed Effect, Effect Size, Irrelevance Proposition, Strategic Management, Firm Evolution, Theories of the Firm
JOURNAL NAME:
Modern Economy,
Vol.10 No.5,
May
27,
2019
ABSTRACT: Age of firms is used with an
alarming regularity in various studies in the fields of organizational
behavioral, accounting and corporate finance/law/governance,
industrial economics and the like. The variable “firm age” is typically called
a control variable. Why it is necessary or what it controls is infrequently
explained. The variable’s statistical significance or insignificance is
duly noted; explanation thereof is hardly ever provided. This paper
demonstrates that this variable does not provide any sensible information its
users would have us believe. The paper provides numerous examples demonstrating
that managerial discretion changes the nature and value of the firm, thereby
negating the value of the variable. We recommend that a conceptual foundation
be secured before using the variable and it not be wantonly used as a control
or fixed-effect variable. Researchers would do well to report the effect size
instead of merely statistical significance at some level.