Persistence and Determinants of Firm Profit in Emerging Markets

The paper studies the persistence of profit and its determinants in emerging markets. We apply Markov chain analysis, dynamic panel GMM estimation, and quantile regression techniques to a panel of approximately 3,000 Ukrainian companies. The empirical results show a moderate level of profit persistence, as well as a relatively low speed of adjustment to the steady-state profit level, thus providing no support for the hypothesis that there is a lower persistence of profits in emerging markets due to more intense competition. Regarding the determinants of firm profit in an emerging market economy, the findings from alternative methods reveal that ownership structure and regional location of the firm have a significant impact.

Introduction: A basic premise of economic theory is that company profit rates should converge to equality in competitive markets. Empirical studies, however, frequently find that dier-ences in profits across firms tend to persist over time. Moreover, there is considerable variation across countries as to the speed with which firm prots adjust (or reach) their permanent values (e.g., Cubbin and Geroski 1987, Waring 1996, Glen and Singh 2004).These differences could be due to the varying strength of anti-trust policies and country specific regulatory systems (Geroski and Jacquemin 1988). One of the main conclusions of the literature has been that rivalry alone does not erase persistent asymmetries among firms.

Author: Andreas Stephan,Andriy Tsapin

Source: Royal Institute of Technology

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