Survival and the Ergodicity of Corporate Profitability

Philipp Mundt (), Simone Alfarano and Mishael Milaković
Additional contact information
Philipp Mundt: Department of Economics, University of Bamberg, D-96052 Bamberg, Germany

Management Science, 2022, vol. 68, issue 5, 3726-3734

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.

Keywords: performance; dynamic competition; corporate strategy; stochastic differential equation (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2022.4395 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:68:y:2022:i:5:p:3726-3734

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().