Which Competitive Efforts Lead to Future Abnormal Economic Rents? Using Accounting Ratios to Assess Competitive Advantage

Abstract

Strategy theory suggests that firms can impede mean reversion of economic rents by employing competitive efforts, thereby impacting profitability, forecasting, and valuation. We use realized operating performance to establish which competitive effort proxies effectively protect rents. The inclusion of competitive advantage proxies improves future accounting return forecasts and several efforts generalize across industries including power over suppliers and the credible threat of expected retaliation (Porter, 1980). Traditional barriers‐to‐entry proxies (product differentiation, innovation, and capital requirements) do not result in higher profitability once risk‐ and industry‐adjusted. Finally, competitive efforts are not fully impounded into stock price, resulting in abnormal future returns.

Determinants of Profitability: A Study on Manufacturing Companies Listed on the Dhaka Stock Exchange

“…Managerial efficiency also has a statistically significant positive relationship with profitability (Jamali and Asadi, 2012). Capital intensity shows a statistically significant positive relationship with profitability, supporting Goldar & Aggarwal (2005) and varying from Dickinson & Sommers (2012).…”

“…Chowdhury and Amin (2007), , Hirsch, Schiefer, Gschwandtner, and Hartmann (2014) and Zaid et al (2014) also found the same result, while Sur and Chakraborty (2011) found no significant relationship, and Eljelly 2004 Capital-intensive industries are required to take a high level of investment in fixed assets for starting up a business as well as for their overall functioning (Pervan et al, 2019). Goldar and Aggarwal (2005) found a positive relationship between capital intensity and profitability, while Dickinson and Sommers (2012) found a negative relationship.…”

“…This means that sales growth has a significant positive impact on ROA. The beta coefficient of CI is 0.161 with a p-value of .020, which is statistically positively significant at a 5% level, supporting Goldar & Aggarwal (2005) and contradicting Dickinson & Sommers (2012). This means that capital intensity has a significant positive impact on ROA.…”

Determinants of firm profitability in the Croatian manufacturing industry: evidence from dynamic panel analysis

“…Consequently, more capital-intensive industries may have a higher level of price-cost margins in comparison to less capital-intensive industries (Strickland & Weiss, 1976;Domowitz, Hubbard, & Petersen, 1986a;Prince & Thurik, 1993;Go, Kamerschen, & Delorme, 1999, Goldar & Aggarwal, 2005. However, at the mature phase of the industry, due to excess capacity capital investments could negatively affect profitability (Lieberman, 1987;Dickinson & Sommers, 2012).…”

Historical cost measurement and the use of DuPont analysis by market participants

“…Dickinson and Sommers (2012), however, find that many competitive advantages do not lead to a sustainable increase in return on net operating assets.A.Curtis et al …”