Industry-average Profitability Research Articles

Expense shifting and revenue shifting in the income statement: substitutes or complements?

PurposeThe study aims at examining the relationship between the forms of misclassification practices, namely expense shifting and revenue shifting. In particular, the study aims at identifying the form of shifting that has been preferred by firms to meet the industry average profitability.Design/methodology/approachCore earnings and operating revenue expectation models are used to measure expense shifting and revenue shifting, respectively. The panel fixed-effects models are used to control for unobserved heterogeneity across industries and time.FindingsBased on a sample of Bombay Stock Exchange-listed firms, the author finds that firms prefer expense shifting over revenue shifting to meet industry average profitability, implying that firms choose the shifting tool based on the relative advantage. Further, the findings deduced from the empirical results demonstrate that firm life cycle and mandatory adoption of International Financial Reporting Standards (IFRS) moderates the relationship between shifting forms and industry average profitability. However, the negative impact of IFRS on shifting practices is found to be less pronounced among BigN audit firms.Originality/valueThe study is among the pioneering attempt to document the substitution relationship between shifting forms. It is the first study that examines a form of classification shifting, where gross profit and core earnings both change as an effect of misclassification.

Gross profit manipulation in emerging economies: evidence from India

PurposeThis study aims to explore peer performance as the motivation behind gross profit manipulation through two different channels, namely, cost of goods sold (COGS) misclassification and revenue misclassification.Design/methodology/approachGross profit expectation model (Poonawala and Nagar, 2019) and operating revenue expectation model (Malikov et al., 2018) are used to measure COGS and revenue misclassification, respectively. The panel data regression models are used to analyze the data for this study.FindingsThe study results show that firms engage in gross profit manipulation to meet the industry’s average gross margin, implying that peer performance is an important benchmark that firms strive to achieve through misclassification strategies. Further results exhibit that firms prefer COGS misclassification over revenue misclassification for manipulating gross profit, implying that firms choose the shifting strategy based on the relative advantage of each shifting tool.Practical implicationsThe findings suggest that firms that just meet or slightly beat industry-average profitability levels are highly likely to engage in classification shifting (CS). Thus, investors and analysts should be careful when evaluating such firms by comparing them with other firms in the same industry.Originality/valueFirst, this study is among earlier attempts to investigate CS motivated by peer performance. Second, this study investigates both tools of gross profit manipulation by taking a uniform sample of firms over the same period and provides compelling evidence that firms prefer one shifting tool over another depending on the relative advantage of each shifting tool.

PRACTICAL ASPECTS OF EVALUATING THE EFFECTIVNESS OF THE INDUSTRIAL ENTERPRISE MANAGEMENT SYSTEM

It is necessary to differentiate when considering the effectiveness of the organization’s management system: the organizational structure of management as a formalized descriptive scheme for the distribution of tasks and responsibilities and the organizational management system as approaches, methods used in the relationship between the object and the subject of management. The article provides assessment tools in the case of considering the efficiency of the functioning of the managed system as a whole or its elements: comparison of the market value of the organization and the book value of its assets or equity; comparison of the amount of revenue, net profit, industry average profitability indicators and indicators of a particular organization; comparison of non-financial indicators, for example, market share, labor productivity, employee satisfaction, etc. It is shown that index and coefficient methods are used to assess the effectiveness of management in the narrow sense as the effectiveness of the actual management activity. The method for assessing the effectiveness of an organization’s management system is proposed. The results of practical research on the proposed method are shown on the example of domestic and foreign industrial enterprises.

Earnings management to achieve industry-average profitability in Japan

ABSTRACT This study examines earnings management activities to achieve industry-average profitability in Japanese firms. I focus on Japanese firms because they tend to be preoccupied with the activities and profitability of industry competitors. I find that firms just meeting or slightly beating industry-average profitability (JUSTMEET_PEER firms) are positively related to real and accrual-based earnings management. I also find that the positive relationship between JUSTMEET_PEER firms and real earnings management is stronger when the JUSTMEET_PEER firms operate in more competitive industries. Finally, similar evidence is found for firms that just meet and slightly beat industry-average forecast profitability. These findings suggest that Japanese firms tend to regard industry-average profitability as an important benchmark and are likely to engage in earnings management to achieve the benchmark.

Benefits and Trade-Offs of Dairy System Changes Aimed at Reducing Nitrate Leaching.

Simple SummaryReducing inputs of nitrogen fertiliser and purchased feed, with an associated reduction in stocking rate on pastoral dairy farms resulted in less nitrate leaching. A co-benefit was a reduction in greenhouse gas emissions. The exception was the implementation of a wintering barn where nitrate leaching was reduced, but greenhouse gas emissions remained unchanged due to greater manure storage and handling. Emission reductions in the lower-input systems came at an average loss of profit of approximately NZ$100 per tonne CO2-equivalent.Between 2011 and 2016, small-scale farm trials were run across three dairy regions of New Zealand (Waikato, Canterbury, Otago) to compare the performance of typical regional farm systems with farm systems implementing a combination of mitigation options most suitable to the region. The trials ran for at least three consecutive years with detailed recording of milk production and input costs. Nitrate leaching per hectare of the milking platform (where lactating cows are kept) was estimated using either measurements (suction cups), models, or soil mineral nitrogen measurements. Post-trial, detailed farm information was used in the New Zealand greenhouse gas inventory methodology to calculate the emissions from all sources; dairy platform, dairy support land used for wintering non-lactating cows (where applicable) and replacement stock, and imported supplements. Nitrate leaching was also estimated for the support land and growing of supplements imported from off-farm using the same methods as for the platform. Operating profit (NZ$/ha/year), nitrate leaching (kg N/ha/year), and greenhouse gas emissions (t CO2-equivalent/ha/year) were all expressed per hectare of milking platform to enable comparisons across regions. Nitrate leaching mitigations adopted in lower-input (less purchased feed and nitrogen fertiliser) farm systems reduced leaching by 22 to 30 per cent, and greenhouse gas emissions by between nine and 24 per cent. The exception was the wintering barn system in Otago, where nitrate leaching was reduced by 45 per cent, but greenhouse gas emissions were unchanged due to greater manure storage and handling. Important drivers of a lower environmental footprint are reducing nitrogen fertiliser and purchased feed. Their effect is to reduce feed flow through the herd and drive down both greenhouse gas emissions and nitrate leaching. Emission reductions in the lower-input systems of Waikato and Canterbury came at an average loss of profit of approximately NZ$100/t CO2-equivalent (three to five per cent of industry-average profit per hectare).

이익조정과 산업평균수익성 목표의 관련성

본 연구의 목적은 동종 산업의 평균수익성 달성이 경영자의 이익조정에 미치는 영향을 확인하는 것이다. 구체적으로 동종 산업의 평균수익성을 약간 초과 달성한 기업들의 경우 그렇지 않은 기업들보다 이익을 더 상향 조정하는지, 이러한 산업 평균수익성 달성과 이익조정의 관계에 산업내 경쟁도가 영향을 미치는지, 동종 산업의 평균수익성을 약간 초과 달성한 기업들이 그렇지 않은 기업들 보다 이익조정시 발생액 이익조정과 실제이익조정을 더 보완적으로 활용하는지 등을 확인하였다.BR 2012년부터 2017년까지 한국거래소 유가증권 및 코스닥시장에 상장된 총 8,836개(기업-년) 자료를 대상으로 분석한 결과를 요약하면 다음과 같다. 첫째, 산업평균 수익성을 약간 초과한 기업들은 그렇지 않은 기업들보다 발생액 이익조정 뿐만 아니라 실제이익조정도 더 많이 하는 것으로 나타났다. 둘째, 산업경쟁도가 높은 경우 산업평균 수익성을 약간 초과한 기업들은 그렇지 않은 기업들보다 발생액이익조정 뿐만 아니라 실제이익조정을 통해 더 많은 이익조정을 하는 것으로 나타났다. 셋째, 산업평균 수익성 관점에서 이익조정 유인이 있는 기업들은 그렇지 않은 기업들보다 이익조정시 발생액 이익조정과 실제이익조정을 더 보완적으로 활용하는 것 같지는 않은 것으로 나타났다.BR 본 연구에서의 이러한 결과는 다음과 같은 측면에서 의의가 있다고 본다. 경영자의 이익조정 동기는 선행연구들에서 많이 다룬 적자회피, 전기 대비 이익감소 회피, 재무분석가의 이익예측치 달성 등에만 있는 것이 아니고, 동종 산업의 평균 수익성 달성 여부도 이익조정 유인으로 작용할 수 있다는 것이며, 기업의 이익조정 현상을 분석하려고 할 경우 산업내 경쟁도 역시 고려해야 한다는 것이다.

Industries’ Potential for Interdependency and Profitability: A Panel of 135 Industries, 1988–1996

An industry’s potential for interdependency among productive activities is one of the central concepts in strategic management. Although theoretical models have clarified how and why industry average profitability should peak at moderate levels of interdependency, the empirical evidence so far has not supported the inverted-U-shaped relationship. By developing a measure that is based on how frequently pieces of knowledge are used jointly in technological inventions, we find strong support that confirms the predicted relationship between interdependency and industry average profitability. We also find evidence supporting an inverted-U-shaped relationship between interdependency and firm profitability. Moreover, our measure captures how the potential in interdependency may change over time within an industry. The temporal variation allows us to correct omitted variable biases, which poses concerns that weren’t raised in previous studies. The measure is created from more than 1.93 million technological patents that have been approved by the U.S. Patent and Trade Office between 1901 and 1996. Since patent data are available to the public, future studies can readily build on our measure of industries’ potential for interdependency.

"Industries’ Potential For Interdependency And Profitability: A Panel Of 135 Industries, 1988-1996"

An industry’s potential for interdependency among productive activities is one of the central concepts in strategic management. Although theoretical models have clarified how and why industry average profitability should peak at moderate levels of interdependency, the empirical evidence so far has not supported the inverted-U-shaped relationship. By developing a measure that is based on how frequently pieces of knowledge are used jointly in technological inventions, we find strong support that confirms the predicted relationship between interdependency and industry average profitability. We also find evidence supporting an inverted-U-shaped relationship between interdependency and firm profitability. Moreover, our measure captures how the potential in interdependency may change over time within an industry. The temporal variation allows us to correct omitted variable biases, which poses concerns that weren’t raised in previous studies. The measure is created from more than 1.93 million technological paten...

Accounting Profitability and Takeover Likelihood

This study examines the association between accounting profitability and takeover likelihood of a firm. Takeover likelihood is negatively associated with negative industry-adjusted ROA, and is positively associated with positive industry-adjusted ROA. The negative association is consistent with Palepu’s (1986) argument that acquirers can unlock more value in firms with poorer performance through efficient management. The positive association among firms with above industry average profitability is consistent with the opportunistic behavior of acquirers’ management. The positive association is more (less) pronounced when the personal benefits (costs) of acquisition to acquirers’ management is greater.

Real and Accrual-Based Earnings Management to Achieve Industry-Average Profitability: Empirical Evidence from Japan

This paper examines real and accrual-based earnings management to achieve industry-average profitability in Japanese firms. I focus on three types of real earnings management: sales manipulation, the reduction of discretionary expenditures, and overproduction. The results indicate that Japanese firms engage in income-increasing real and accrual-based earnings management to achieve industry-average profitability. Specifically, I find evidence of income-increasing real and accrual-based earnings management in firms that just meet or slightly beat industry-average profitability. The results also indicate that firms in more competitive industries engage in greater income-increasing earnings management to achieve industry-average profitability. The evidence in this paper is important because it suggests that managers engage in both real and accrual-based earnings management with an awareness of the profitability of competing firms in the same industry. Further, this paper shows the complementary relationship between two types of real (sales manipulation and overproduction) and accrual-based earnings management to achieve industry-average profitability. It also provides evidence of real and accrual-based earnings management to achieve industry-median profitability and industry-average forecast profitability.

Profitability of industries and firms over time

Purpose – The purpose of this paper is to further the knowledge of how industries perform, and sheds light on how the relative positions of industry change over time. Design/methodology/approach – Using rank-order listings, histograms, and linear regressions, the comparisons of firms in the Fortune 1000 yield four results, two that are confirmatory, and two that are new. Findings – As expected, industries differ widely in performance, regardless of the financial metric used, and there is a dramatic difference between within-industry variance (high) and between-industry variance (low). In fact, high-performing firms in less profitable industries often outperform low-performing firms in more profitable industries. Contrary to previous research, the paper shows that industries shift relative position over time: the industries with the highest return on equity in one year often are not the highest in subsequent years; and, contrary to IO theory, the paper finds that concentration is not a reliable predictor of profitability. Although certain industries may show increased profitability after undergoing concentration, there is no consistent relationship between an industry's concentration ratio and that industry's average profitability. Research limitations/implications – While the research is limited to its use of visual (such as histogram) and qualitative (such as rank-order) observations of only large (Fortune 1000) US-based, public firms, the results suggest that researchers should decompose the elements of industry structure and firm strategies to understand what, specifically, contributes to variation in firm performance. Practical implications – For executives, the research confirms that the quality of their business strategies is more important than the initial choice of industries within which they choose to compete. Simply competing in an industry with high average profitability does not guarantee success. Originality/value – This research shows how industries vary significantly in relative profit rankings over time, a finding that differs from prior research where time coefficients are found to be small. In addition, the research challenges the traditional IO notion that industry concentration leads to superior performance.

Determinants of profit efficiency: evidence from Korean savings banks

This article shows the profit efficiency and its determinants in Korean savings banks in the period 2002–2008 using a three-step estimation procedure: profit efficiency, computed in the second step after the first step Generalized Method of Moments (GMM) estimation, is regressed on the environmental variables in the third step. We found that industry-average profit efficiency dropped in 2004–2005 and quickly rebound in the subsequent years. We also found that unit banks and small banks are more efficient than affiliated banks and large banks. This article then analyses determinants of profit efficiency and presents three findings: (1) interest rate is the most important factor, with a 1% point increase in interest rate leading to a 20% point increase in profit efficiency; (2) profit efficiency declines as bank assets increase, implying that the expansionary strategy is not profit-enhancing unless current technology for financial intermediation changes; and (3) an increase in noncollateral loans lowers pro...

Accounting for competitive advantage: The resource-based view of the firm and the labour theory of value

The paper uses accounting concepts to assist the field of strategic management in its search for a theory of value, competitive advantage and superior profitability. Specifically, it argues that the resource-based view of the firm requires a labour theory of value creation. Using the Circuit of Capital as an organizing framework the paper integrates RBV and Marx's value theory, by introducing the notion of value as socially necessary labour time, into the analysis of resource based advantage. This enables us to identify the impact of particular sources of competitive advantage as they become diffused through an industry. Some resource based advantages, when eventually imitated lead to an overall reduction in industry profitability, and other advantages lead to increases in industry average profitability.

Interdependency, Competition, and the Distribution of Firm and Industry Profits

Coordination of interdependencies among firms’ productive activities has been advanced as a promising explanation for sustained heterogeneity in capabilities among firms. In this paper, we extend this line of research to determine the industry structures and patterns of expected firm profits for the case when difficulty optimizing interdependent activities does, in fact, generate and sustain capability heterogeneity among firms. We combine a widely used agent-based model where firms search to discover sets of activities that complement one another (reducing overall costs or raising product quality) with traditional economic models of competition among profit-maximizing firms. The agent-based model produces a distribution of performance (interpreted as variable cost or product quality) among firms and the competition models determine resulting industry outcomes including patterns of entry, exit, and profits. The integration of economic models of competition among firms with an agent-based model of search for improvement by firms reveals a rich relationship between interdependencies in production functions and industry structure, firm profits, and industry average profitability.

Manufacturer Benefits from Information Integration with Retail Customers

Information integration efforts between manufacturers and retailers, in the form of information sharing, synchronized replenishment, and collaborative product design and development, have been cited as major means to improve supply chain performance. This paper develops a conceptual framework that relates information-integration initiatives to manufacturer profitability. The framework allows such initiatives to impact inventory management and revenue-enhancing measures that, in turn, increase manufacturer profit margins, or affect profit margins directly. Through an extensive survey in the food and consumer packaged goods industry, we empirically examine this framework. The analysis reveals that the various integration techniques are differentially associated with manufacturer performance. Collaborative planning on replenishment, in the form of vendor-managed inventory (VMI), is directly and positively related to manufacturer margins, while collaboration on new products and services is positively related to intermediate performance measures. Specifically, this latter form of collaboration allows the manufacturer to charge higher wholesale prices and, interestingly, is associated with lower retailer, and consequently manufacturer, stockouts. In contrast, collaboration on the handling of excess and defective retailer inventory (i.e., reverse logistics) results in higher manufacturer stockout levels, on average. Solely sharing information on either inventory levels or customer needs is associated with higher manufacturer performance measures up to a certain point; sharing this information is prevalent among manufacturers that achieve industry-average profitability relative to those that achieve below industry-average profitability. The paper explains these results in the context of the conceptual framework developed and discusses the managerial implications for effective coordination between supply chain partners.

Information and Learning in Bertrand and Cournot Experimental Duopolies

In this paper we report the results from a series of experiments on Cournot (homogeneous and differentiated products) and Bertrand (differentiated products) duopoly markets with no uncertainty, fixed endpoints and random matching. For each set, the experiments are designed with three alternative information set up: I) no information (participants are only informed on their own payoff for the period), 2) average industrial profit (participants are informed on their own performance, as well as on the average profit in all markets), 3) imitation (players are informed, on request, on their rivals' past successful actions). The effect of different information structures on individual behaviour in market experiments is a long debated issue. Recently, using evolutionary arguments, it has been argued that the imitation of successful strategies induces more competitive equilibria in market games (M. Schaffer, 1989; F. Vega-Redondo 1997). By the same token, the information on the industry's average profitability might induce more collusive outcomes, if such markets signals are perceived by players as aspiration levels and if they therefore try new strategies anytime their profits fall below such threshold (F. Palomino and F. Vega-Redondo, 1999; H. Dixon, 2000). Our aim is to test such predictions in duopoly price and quantity games. We find that the imitation learning rule prevails when players have full information on their rivals' previous choices, and such learning behaviour induces more competitive outcomes in the Cournot market designs. As for the aspiration learning rule, the evidence is unclear. Whilst in the majority of the cases, players experiment new strategies when their payoff falls below the average profit, as predicted by the aspiration rule, we find no evidence of convergence to collusion, though in the Cournot experiments, the fraction of players choosing cooperative actions in the last stages of the game significantly increase in the second information setting.