Profit Rate and Profit Persistence in the Norwegian Construction Industry – A Sector with Different Segments, Strong Competition and Many Small Companies

Abstract

There exist numerous published articles that examine the level of profit persistence across various industries. Such analyses prove highly valuable in acquiring a deeper understanding of the market. This paper investigates how important business-specific factors are for businesses involved in construction industry. This sector is characterized by its high capital intensity and sensitivity to economic cycles. To investigate its dynamics, researchers commonly employ the dynamic panel data approach along with the Generalized Method of Moments (GMM) estimator, a widely used econometric technique. The approach is to estimate to what degree firms can make a profit and outperform the market. We split the sample of Norwegian construction firms from 2006 to 2019 by three criteria: segment, size, and debt. With a comprehensive dataset encompassing information from over 40,000 companies spanning a period of 14 years, there exists a solid foundation for generating accurate estimates. The finding is that the degree of profit persistence (PoP) is considerable in this sector and especially among large companies. The longterm profit rate is around 6 percent. There was a noticeable decline in activity during the financial crisis. The building segment and highly indebted enterprises faced the greatest challenges during that period.