Life and Death of Businesses: A Review of Research on Firm Mortality

Morris, James R.
Journal of Business Valuation and Economic Loss Analysis Vol 4, Issue 1, Article 3

Neither the literature of finance nor the literature of valuation practitioners has taken account of the relatively short life expectancy of firms. Fewer than fifty percent of new firms live longer than ten years; yet, it is common practice to estimate firm value with a very long term horizon model such as the constant growth model. The purpose of this paper is to increase awareness of the life expectancy of firms and show how to take account of the likelihood of firm death in valuation. Data on firm death rates and life expectancy that is available in the field of industrial organization is reviewed and summarized so that valuation practitioners can take it into account in their valuations.