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Survival and the Ergodicity of Corporate Profitability

Author

Listed:
  • Philipp Mundt

    (Department of Economics, University of Bamberg, D-96052 Bamberg, Germany)

  • Simone Alfarano

    (Department of Economics, University Jaume I, E-12071 Castellón, Spain)

  • Mishael Milaković

    (Department of Economics, University of Bamberg, D-96052 Bamberg, Germany)

Abstract
The cross-sectional variation in corporate profitability has occupied research across fields as diverse as strategic management, industrial organization, finance, and accounting. Prior work suggests that corporate idiosyncrasies are important determinants of profitability, but it disagrees on the quantitative importance of particular effects. This paper shows that corporate specificities become irrelevant in the long run because profitability is ergodic conditional on survival, leading to a uniform, time-invariant regularity in profitability that applies across firms. Conditional on survival, we cannot reject the hypothesis that corporations are on average equally profitable and also experience equally volatile fluctuations in their profitability, irrespective of their individual characteristics. Because the same is not true for shorter-lived firms, even for more than 20 years after entry, we can reconcile our findings with an extensive literature that studies profitability in heterogeneous samples of surviving and shorter-lived firms. Our findings provide a new benchmark for long-term performance in competitive environments and offer a novel perspective by highlighting a robust commonality instead of specificities.

Suggested Citation

  • Philipp Mundt & Simone Alfarano & Mishael Milaković, 2022. "Survival and the Ergodicity of Corporate Profitability," Management Science, INFORMS, vol. 68(5), pages 3726-3734, May.
    • Handle: RePEc:inm:ormnsc:v:68:y:2022:i:5:p:3726-3734
    DOI: 10.1287/mnsc.2022.4395
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    4. David Vidal-Tomás & Alba Ruiz-Buforn & Omar Blanco-Arroyo & Simone Alfarano, 2022. "A Cross-Sectional Analysis of Growth and Profit Rate Distribution: The Spanish Case," Mathematics, MDPI, vol. 10(6), pages 1-20, March.

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    More about this item

    Keywords

    performance; dynamic competition; corporate strategy; stochastic differential equation;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General

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