Product Life Cycles in Corporate Finance

We develop a novel 10-K text-based model of product life-cycles and examine firm investment policies. Conditioning on the life cycle substantially improves the explanatory power of investment-Q models. The improved models reveal that investment follows a pecking order through the life cycle. Firms initially focus on R&D, which also becomes very sensitive to Q. CAPX emerges second. Acquisitions then arise as firms mature, and divestitures emerge as firms enter decline. At the aggregate economy level, major shifts away from
mature life cycle stages and toward dynamic stages explain much of the disappearing CAPX anomaly, and why the explanatory power of Q-models is increasing over time. International competition is a likely catalyst for these
changes.