Abstract
The competitive environment hypothesis is one of the basic ideas in mainstream economic theory. It states that the competitive process eliminates all economic profits and losses in the long-run so profits do not persist. This article studies the competitive environment hypothesis of 125 Istanbul Stock Exchange (ISE) quoted manufacturing firms that survived during the period of 2009:1–2010:4, which can be considered as the short-run. Net income after tax to total assets (return on assets [ROA]) and net income after tax to total equity (return on equity [ROE]) are both used as profit measures. Starting with Levin et al. and Im et al.’s panel unit root tests, pooled Ordinary Least Squares (OLS), panel fixed effects and cross-sectional analysis are employed. The results indicate that competitive environment hypothesis is viable and profits do not persist in the short-run.
Highlights
IntroductionAll economic profits and losses are expected to vanish in the long-run
In a competitive market, all economic profits and losses are expected to vanish in the long-run
This study investigates competitive environment hypothesis in the profits of complete 125 manufacturing firms which are quoted on the Istanbul Stock Exchange (ISE) and survived between 2009 and 2010
Summary
All economic profits and losses are expected to vanish in the long-run. The vast majority of these studies follow an autoregressive regression methodology in testing profits persistence This includes testing for a unit root in firm level profitability series, which would indicate that shocks to profitability persist indefinitely and that competitive pressures never eliminate differences in profitability. The aim of this study is to present further evidence on the persistence of profit in the short-run by employing several alternative methods in the empirical analysis. In this respect, persistence of profit in Turkish manufacturing industry is investigated with eight quarters of 125 firms which gives a total number of 1000 observations (2009:1–2010:4) which are econometrically enough to be analysed.
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