Abstract
This paper examines how a firm's long-term earnings rankings within the industry convey valuable information about its competitive advantages. Earnings rankings are isolated from industry and market-wide factors, therefore, contain firm-specific information that reflects the rareness of the firm's resources and strategies. A higher ranking also indicates more effective value creation and difficulty in imitation, which translates into more sustainable future performance. Since a firm's competitive advantages are defined by rareness, imitability, value, and sustainability, earnings rankings provide a numeric summary of competitive advantages. We decile rank a firm's earnings within the industry and conduct a principal component analysis to measure competitive advantages. The findings confirm a significant positive association between earnings rankings and competitive advantages. In particular, long-term earnings rankings, measured by the 5-year moving averages, should be the most informative. Our results shed light on the usefulness of accounting numbers in implementing strategic management based on competitive advantages.
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