Innovation and the firm life cycle

A firm's standing relative to its life cycle has significant implications for financial decisions, including its dividend policy. Researchers have advanced several measures to determine a firm's maturity stage, with the foremost being firm age. However, these measures are deficient because they cannot directly measure a firm's growth prospects. Drawing on Mueller's [ Journal of Industrial Economics , 20, 3 (1972)] argument that innovation is the primary driver of a firm's growth rate, and employing multivariate analysis, we demonstrate how innovation can suspend the maturity stage and associated financial decisions, such as dividend payouts, by “out-innovating" competitors. We show that innovation enables a company to determine its growth path and stages of its growth-driven life cycle, thus influencing its financial strategy. Further, our research findings show that innovation efficiency, as a life cycle proxy, addresses the shortcomings of prevailing proxies and offers empirically robust refinements to the broader life cycle framework.