Product Life Cycles in Corporate Finance

We build a dynamic text-based model of the product life cycle aggregated to the firm level. Motivated by theory, we model five stages: product innovation, process innovation, maturity, decline, and delisting. We find that firms, on average, follow identifiable transitions through the cycle as they age, however major shocks can disrupt, reverse, or accelerate this progression. A firm's position in the life cycle has material consequences for its investment policies,the sensitivity of its investment to Tobins' Q, its acquisition strategy, and its longer-term outcome. Regarding investment, a conditional investment-Q model vastly outperforms a simple investment-Q model in predicting investment, and moreover the advantage of the conditional model is growing in magnitude during our sample as firms are becoming larger and more complex. Overall our findings document a first-order role played by product life cycles in shaping an array of important corporate finance decisions.