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What Do We Know About Variance in Accounting Profitability?

  • Anita M. McGahan

    ()

    (Boston University School of Management, 595 Commonwealth Avenue, Boston, Massachusetts 02215)

  • Michael E. Porter

    ()

    (Harvard Business School, Soldiers Field, Boston, Massachusetts 02163)

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    In this paper, we analyze the variance of accounting profitability among a broad cross-section of forms in the American economy from 1981 to 1994. The purpose of the analysis is to identify the importance of year, industry, corporate-parent, and business-specific effects on accounting profitability among operating businesses across sectors. The findings indicate that industry and corporate-parent effects are important and related to one another. As expected, business-specific effects, which arise from competitive positioning and other factors, have a large influence on performance. The analysis reconciles the results of previous studies by exploring differences in method and data. We also identify the broad contributions and limitations of the research, and suggest avenues for further study. New approaches are necessary to generate significant insights about the relationships between industry, corporate-parent, and business influences on firm profitability.

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    File URL: http://dx.doi.org/10.1287/mnsc.48.7.834.2816
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 48 (2002)
    Issue (Month): 7 (July)
    Pages: 834-851

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    Handle: RePEc:inm:ormnsc:v:48:y:2002:i:7:p:834-851
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    1. Schmalensee, Richard., 1984. "Do markets differ much?," Working papers 1531-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    2. McGahan, Anita M, 1999. "The Performance of US Corporations: 1981-1994," Journal of Industrial Economics, Wiley Blackwell, vol. 47(4), pages 373-98, December.
    3. Anita M. McGahan & Michael E. Porter, 1999. "The Persistence of Shocks to Profitability," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 143-153, February.
    4. Lieberman, Marvin B, 1987. "Excess Capacity as a Barrier to Entry: An Empirical Appraisal," Journal of Industrial Economics, Wiley Blackwell, vol. 35(4), pages 607-27, June.
    5. Bresnahan, Timothy F., 1989. "Empirical studies of industries with market power," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 17, pages 1011-1057 Elsevier.
    6. van Breda, Michael F, 1984. "The Misuse of Accounting Rates of Return: Comment," American Economic Review, American Economic Association, vol. 74(3), pages 507-08, June.
    7. Long, William F & Ravenscraft, David J, 1984. "The Misuse of Accounting Rates of Return: Comment," American Economic Review, American Economic Association, vol. 74(3), pages 494-500, June.
    8. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 1, number 1.
    9. Fisher, Franklin M & McGowan, John J, 1983. "On the Misuse of Accounting Rates of Return to Infer Monopoly Profits," American Economic Review, American Economic Association, vol. 73(1), pages 82-97, March.
    10. Martin, Stephen, 1984. "The Misuse of Accounting Rates of Return: Comment," American Economic Review, American Economic Association, vol. 74(3), pages 501-06, June.
    11. Mueller,Dennis C., 2009. "Profits in the Long Run," Cambridge Books, Cambridge University Press, number 9780521101592, September.
    12. Horowitz, Ira, 1984. "The Misuse of Accounting Rates of Return: Comment," American Economic Review, American Economic Association, vol. 74(3), pages 492-93, June.
    13. Waring, Geoffrey F, 1996. "Industry Differences in the Persistence of Firm-Specific Returns," American Economic Review, American Economic Association, vol. 86(5), pages 1253-65, December.
    14. R. Schmalensee & R. Willig (ed.), 1989. "Handbook of Industrial Organization," Handbook of Industrial Organization, Elsevier, edition 1, volume 2, number 2.
    15. Fisher, Franklin M, 1984. "The Misuse of Accounting Rates of Return: Reply," American Economic Review, American Economic Association, vol. 74(3), pages 509-17, June.
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