The Shockingly Short Life Spans of Public Firms
WHY YOU SHOULD CARE
Because if your company is going down, don’t you want a heads-up?
By Meghan Walsh
From the moment we’re born our biological ticker starts counting down the days until, well, you know. Turns out publicly traded companies are like any other living organism governed by Mother Nature. But not unlike a Great Dane, their average lifespan is a measly
Based on a study out of the Santa Fe Institute, organized by a crew of theoretical physicists, an anthropologist and an economic intern, these types of firms die off at roughly the same rate regardless of size, sector or even how well-established they are. That the probability of failure is the same for everyone is “the most surprising thing they found,” says Robert Axtell, who teaches mathematical modeling of social and economic processes at George Mason University. While the causes of death can vary from being bought up (the most common), merging with another company or filing for bankruptcy, in the end the odds of heading to the incinerator are the same for all of ’em.
Considering how much money is on the line — the total worth of companies on the New York Stock Exchange is more than $16 trillion, almost as much as the entire U.S. GDP — it’s surprising how little research has been done on what those in the field call company mortality. And the theories that are floating around are often contradictory or flat out wrong. Some say young, less entrenched companies are most vulnerable, while others say it’s the elderly and less agile that need to watch out. “Like other organisms that have DNA governing their growth, this study suggests there is something very fundamental about the dynamics of public companies and the way they grow and die,” says Marcus Hamilton, one of the study’s authors and a postdoctoral fellow studying the evolution of human ecology.
To arrive at their conclusion, the researchers analyzed figures from Standard and Poor’s Compustat, a database of publicly traded companies on the New York Stock Exchange dating back to 1950, using a statistical technique called survival analysis. But the paper doesn’t answer what exactly leads some squads to survive longer than others. It’s also important to note that the vast majority of firms are privately held. “They’re missing half the story,” Axtell says. And in the private landscape he still suspects that smaller and younger companies are more vulnerable.
In the coming decade this area of research, which looks at how and why corporations do what they do and the consequences of those choices, will only continue to grow. In the meantime, savvy CEOs will use the incoming insights to design their business plans. Or, with a more accurate gauge of just how competitive the markets are, potential entrepreneurs may think twice about testing the waters. “This raises a big question for investors and employees of publicly held firms,” Axtell says.