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Survival and the ergodicity of corporate profitability

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  • Mundt, Philipp
  • Alfarano, Simone
  • Milaković, Mishael
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 industry affiliation as well as different forms of corporate idiosyncrasies are important determinants of profitability, but it disagrees widely on the quantitative importance of particular effects. This paper shows that industry and corporate specificities become irrelevant in the long run because profitability is ergodic conditional on survival, implying that there is 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. The same is not true for shorter-lived firms, even for up to 20 years after entry or before exit, and would explain the contradictory findings in the extant literature, which usually considers samples containing heterogeneous mixtures of surviving and shorter-lived companies. Therefore the mere fact of survival, rather than any previously suggested set of variables, becomes the only relevant information for corporate profitability in the long run.

Suggested Citation

  • Mundt, Philipp & Alfarano, Simone & Milaković, Mishael, 2020. "Survival and the ergodicity of corporate profitability," BERG Working Paper Series 162, Bamberg University, Bamberg Economic Research Group.
    • Handle: RePEc:zbw:bamber:162
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    Cited by:

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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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