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Explaining the Persistence of Profits: A Time-Varying Approach

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  • Adelina Gschwandtner
  • Jesus Crespo Cuaresma

Abstract

The present paper analyzes the determinants of profit persistence using a newly developed methodology that allows the persistence parameter to vary with time. It therefore addresses a significant limitation of previous persistence models, which have assumed unrealistically that persistence is fixed over relatively long periods of 20 years and upwards. The concentration of the industry is found to have a significant positive impact on profit persistence. However, at firm level, market share and risk have a surprisingly negative impact

Suggested Citation

  • Adelina Gschwandtner & Jesus Crespo Cuaresma, 2013. "Explaining the Persistence of Profits: A Time-Varying Approach," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 20(1), pages 39-55, February.
  • Handle: RePEc:taf:ijecbs:v:20:y:2013:i:1:p:39-55
    DOI: 10.1080/13571516.2012.750051
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    References listed on IDEAS

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    1. Jesus Crespo Cuaresma & Adelina Gschwandtner, 2006. "The competitive environment hypothesis revisited: non-linearity, nonstationarity and profit persistence," Applied Economics, Taylor & Francis Journals, vol. 38(4), pages 465-472.
    2. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    3. Shepherd, William G, 1972. "The Elements of Market Structure," The Review of Economics and Statistics, MIT Press, vol. 54(1), pages 25-37, February.
    4. Ben-Zion, Uri & Shalit, Sol S, 1975. "Size, Leverage, and Dividend Record as Determinants of Equity Risk," Journal of Finance, American Finance Association, vol. 30(4), pages 1015-1026, September.
    5. Lang, Larry H P & Stulz, Rene M, 1994. "Tobin's q, Corporate Diversification, and Firm Performance," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1248-1280, December.
    6. Schmalensee, Richard, 1989. "Inter-industry studies of structure and performance," Handbook of Industrial Organization,in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 16, pages 951-1009 Elsevier.
    7. Adelina Gschwandtner, 2005. "Profit persistence in the 'very' long run: evidence from survivors and exiters," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 793-806.
    8. Jesús Crespo Cuaresma & Adelina Gschwandtner, 2008. "Tracing The Dynamics Of Competition: Evidence From Company Profits," Economic Inquiry, Western Economic Association International, vol. 46(2), pages 208-213, April.
    9. I. N. Fisher & G. R. Hall, 1969. "Risk and Corporate Rates of Return," The Quarterly Journal of Economics, Oxford University Press, vol. 83(1), pages 79-92.
    10. B. Burcin Yurtoglu, 2004. "Persistence of firm-level profitability in Turkey," Applied Economics, Taylor & Francis Journals, vol. 36(6), pages 615-625.
    11. Ravenscraft, David J, 1983. "Structure-Profit Relationships at the Line of Business and Industry Level," The Review of Economics and Statistics, MIT Press, vol. 65(1), pages 22-31, February.
    12. Esposito, Louis & Esposito, Frances Ferguson, 1971. "Foreign Competition and Domestic Industry Profitability," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 343-353, November.
    13. Harris, Frederick H deB, 1986. "Market Structure and Price-Cost Performance under Endogenous Profit Risk," Journal of Industrial Economics, Wiley Blackwell, vol. 35(1), pages 35-59, September.
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    Cited by:

    1. Stefan Hirsch & Monika Hartmann, 2014. "Persistence of firm-level profitability in the European dairy processing industry," Agricultural Economics, International Association of Agricultural Economists, vol. 45(S1), pages 53-63, November.
    2. repec:spr:epolit:v:34:y:2017:i:3:d:10.1007_s40888-017-0076-0 is not listed on IDEAS

    More about this item

    JEL classification:

    • L00 - Industrial Organization - - General - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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