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      Market Competition, Government Efficiency, and Profitability Around the World
      13 Oct 2011Working Paper Summaries

      Market Competition, Government Efficiency, and Profitability Around the World

      by Paul M. Healy, George Serafeim, Suraj Srinivasan and Gwen Yu
      Understanding whether and how corporate profitability mean reverts across countries is important for valuation purposes. This research by Paul M. Healy, George Serafeim, Suraj Srinivasan, and Gwen Yu suggests that firm performance persistence varies systematically. Country product, capital, and to a lesser extent labor market competition all affect the rate of mean reversion of corporate profits. Corporate profitability exhibits faster mean reversion in countries with more competitive factor markets. In contrast, government efficiency decreases the speed of mean reversion, but only when the level of market competition is held constant. The findings are useful to practitioners and scholars interested in understanding how country factors affect corporate profitability. Key concepts include:
      • There is predictable variation in mean reversion in corporate performance across countries.
      • At a practical level, valuation exercises can benefit from considering country as well as traditional firm and industry factors in settling on the speed with which superior or inferior profits are likely to mean revert.
      • Different level of performance persistence in each country will affect firm-value through valuation multiples.
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      Author Abstract

      We examine how cross-country differences in product, capital, and labor market competition, and government efficiency affect the rate of mean reversion of corporate profitability. Using a sample of 42,337 unique firms from 49 countries, we find that corporate profitability mean reverts faster in countries where product and capital markets are more competitive. Moreover, holding constant product, capital, and labor market competition we find that profitability mean reverts faster in countries with less efficient governments. The findings suggest that country-level factors have an economically significant impact on the rate of corporate profitability mean reversion. The study has implications for forecasting profitability and equity valuation in a global context.

      Paper Information

      • Full Working Paper Text
      • Working Paper Publication Date: May 2011
      • HBS Working Paper Number: 12-010
      • Faculty Unit(s): Accounting and Management
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      Paul M. Healy
      Paul M. Healy
      James R. Williston Professor of Business Administration
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      George Serafeim
      George Serafeim
      Charles M. Williams Professor of Business Administration
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      Suraj Srinivasan
      Suraj Srinivasan
      Philip J. Stomberg Professor of Business Administration
      Unit Head, Accounting and Management
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