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Dynamics of corporate earnings

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  • Robert E. Hall

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 at the level of 35 U.S. 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. However, at the industry level, I find substantial volatility of the unexplained component of earnings.

Suggested Citation

  • Robert E. Hall, 2003. "Dynamics of corporate earnings," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  • Handle: RePEc:fip:fedfpr:y:2003:i:mar
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    References listed on IDEAS

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    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
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    3. 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 225-262, April.
    4. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-227, May.
    5. John Y. Campbell & John H. Cochrane, 1994. "By force of habit: a consumption-based explanation of aggregate stock market behavior," Working Papers 94-17, Federal Reserve Bank of Philadelphia.
    6. Chapman, David A, 1997. " Approximating the Asset Pricing Kernel," Journal of Finance, American Finance Association, vol. 52(4), pages 1383-1410, September.
    7. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
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    Cited by:

    1. Demetrios Eliades & Olaf Weeken, 2005. "The stock market and capital accumulation: an application to UK data," Bank of England working papers 251, Bank of England.

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