In a well-functioning capital market, profits should be the sole criterion for firm survival. Firms reporting losses should not be able to sustain themselves. However, in recent times, loss-making firms have become highly desirable to investors, sometimes even more so than profitable firms. Examples of these types of firms include unicorns, which are startups with valuations exceeding a billion dollars. This shift has raised questions about why losses are no longer seen as detrimental to a company’s success.
The authors of a series of new research papers have delved into this trend to provide some insight. They aim to guide managers in making investments that will lead to real and sustainable profits in the long run. This research emphasizes the importance of looking beyond short-term accounting profits, which may not translate to shareholder wealth over time.
It is important for managers to understand the changing dynamics of the market, where loss-making firms are valued by investors. By focusing on investments that will yield delayed but meaningful profits, companies can ensure their longevity and success in a competitive environment. This research offers valuable insights for decision-makers who must navigate the complexities of the modern capital market.