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Corporate Earnings Track the Competitive Benchmark

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Robert E. Hall

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Abstract

Earnings are the flow of value created by corporations. I concentrate on the concept called EBITDA earnings before interest, taxes, depreciation, and amortization. This measure captures the results of the substantive non-financial activities of corporations and corresponds to the rental price of capital multiplied by the quantity of capital. I measure earnings per dollar of capital for all U.S. corporations and in 5 selected industries. I develop a competitive benchmark for the level of earnings, which takes account of adjustment costs, taxes, depreciation, and the financial opportunity cost of funds. I find that aggregate corporate earnings track the benchmark reasonably closely, leaving a relatively small unexplained component. Thus evidence of the flow of value gives little help in explaining the large discrepancies found in earlier work in the level of the market value of claims on corporations relative to the replacement cost of the capital stock. At the industry level, I find more volatility of both actual and benchmark earnings, with a high correlation between the two in 3 of the 5 industries.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10150.

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Date of creation: Dec 2003
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Handle: RePEc:nbr:nberwo:10150

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E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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  1. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April. [Downloadable!] (restricted)
    Other versions:
  2. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September. [Downloadable!]
  3. Robert E. Hall, 2001. "The Stock Market and Capital Accumulation," American Economic Review, American Economic Association, vol. 91(5), pages 1185-1202, December. [Downloadable!] (restricted)
    Other versions:
  4. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April. [Downloadable!] (restricted)
  5. Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Poterba, James M., 1998. "The rate of return to corporate capital and factor shares: new estimates using revised national income accounts and capital stock data," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 211-246, June. [Downloadable!] (restricted)
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