Company and Industry Financial Performance

Profitability is the only reliable measure of the economic value of a company. Other metrics of performance mislead investors while producing bad corporate decisions. The Institute, in collaboration with Professor Anita McGahan at Boston University, has assembled a large body of data on the performance of all publicly traded business segments and companies in the United States over the 1981 to 1999 period. This data not only sheds light on the causes of company performance, but also provides benchmarks for practitioners to compare performance across companies and industries.

"What Do We Know About Variance in Accounting Profitability?" 
       Anita M. McGahan and Michael E. Porter
     Management Science
     Volume 486, Number 7, July 2002
In this paper, we analyze the variance of accounting profitability among a broad cross-section of firms 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.
Full text of this article is available at Informs PubsOnline

“The Persistence of Shocks to Profitability”
     Michael E. Porter and Anita McGahan
     Review of Economics and Statistics  
     81, no. 1, February 1999: 143-153.
In this study, we use data for 1981 through 1994 on a large sample of U.S. companies to examine the persistence of incremental industry, corporate-parent, and business-specific effects on profitability. Our results indicate that the incremental effects of industry on profitability persist longer than the incremental effects of the corporate parent and of the specific business. Changes in industry structure have a more persistent impact on profitability than do changes in firm structure.

"How Much Does Industry Matter, Really?"
(full text available)
     Anita McGahan and Michael E. Porter
     Strategic Management Journal  July 18, 1997: 15-30.
In this paper, we examine the importance of year, industry, corporate-parent, and business-specific effects on the profitability of U.S. public corporations within specific 4-digit SIC categories. Our results indicate that year, industry, corporate-parent, and business-specific effects account for 2 percent, 19 percent, 4 percent, and 32 percent, respectively, of the aggregate variance in profitability. We also find that the importance of the effects differs substantially across broad economic sectors. Industry effects account for a smaller portion of profit variance in manufacturing but a larger portion in lodging/entertainment, services, wholesale/retail trade, and transportation. Across all sectors we find a negative covariance between corporate-parent and industry effects. A detailed analysis suggests that industry, corporate-parent, and business-specific effects are related in complex ways.

"The emergence and sustainability of abnormal profits”
     Anita M. McGahan and Michael E. Porter
     Strategic Organization, February 2003
In this paper, we examine the emergence and the sustainability of abnormal profits among businesses that were part of U.S. public corporations between 1981 and 1994 and that reported financial results for at least six years.  Our results reveal strong asymmetries between high and low performers.  Overall, high performance is more stable than low performance.  High performers show profits above the average a decade earlier.  In contrast, low performers show profits that are slightly above average a decade earlier.  Industry and corporate-parent effects influence high performance to a far greater degree than low performance.  Low performance is dominated by business-specific effects.