Profitability Premium Research Articles

Investment Flexibility and Stock Returns

We examine the asset pricing implications of a neoclassical model of repeated investment and disinvestment. Prior research has emphasized a negative relation between productivity and equity risk that results from operating leverage when capital adjustment is costly. In general, however, expansion and contraction options affect risk in the opposite direction: they lower equity risk as profitability declines. The general prediction is a nonmonotonic overlay of opposing real option and operating leverage effects. For parameters chosen to match empirical firm characteristics, the predicted nonmonotonicities are quantitatively important, and are detectable in the data. The calibrated model implies that real option effects dominate operating leverage effects, and the average firm is best described by an increasing risk profile, a conclusion supported by conditional beta estimates. The baseline calibration helps explain the profitability premium in the cross-section, but makes the value puzzle worse. Panels with heterogeneous firms can deliver simultaneous profitability and value effects that match empirical levels.

Distribution Restrictions Operate by Creating Dealer Profits: Explaining the Use of Maximum Resale Price Maintenance in State Oil v. Khan

The Supreme Court in State Oil Company v. Khan focused on the control of successive monopoly problems as the sole pro-competitive rationale for maximum vertical resale price maintenance. This article shows that the circumstances that lead a manufacturer to use maximum resale price maintenance are much more complex than the presence of a negatively sloped dealer demand curve and that these more complex conditions must be considered in order to explain Khan. The analysis first demonstrates that there are important reasons other than the classic dealer free riding emphasized in economics and case law for why an incentive incompatibility may exist between a manufacturer and its dealers. Therefore, to enforce dealer performance distribution arrangements must create and preserve a dealer profit premium. This explains why maximum resale price maintenance is not ubiquitous and suggests that to understand Khan we must examine other pro-competitive reasons for maximum resale price maintenance. Maximum resale pr...

An emerging theory of negative loss formation within manufacturing operations

This paper reflects upon six years of research by the author in application of Time Compression and Cell Implementation within British manufacturing industry. The benefits which arise from the application of these concepts to eliminate waste are, it is argued, derived principally from the minimization of time consumption in all forms. In today's business environment this is vitally important since profitability and price premiums are controlled by economic conditions. Indeed all organizations add value and incur negative loss in parallel during the material conversion chain; however, it is the removal of negative loss, which appears to support all major competitive issues. Discussion within the paper surrounds the identification of the large number of variables which contribute to negative loss within the manufacturing organization and its value adding chain. These are more complex than at first envisaged and span many company functions ultimately testing the educational capability, calibre and vision of the entire human resource. Constraints which limit the organization's ability to compete are now seen to stem from an inferior management mindset and a lack of awareness within the management team and are less dependent upon a lack of technology.

Discounted Bonus Policies

The principle underlying all Discounted Bonus Schemes is that the ordinary full profit premium is reduced by anticipating future bonuses. These reduced premium policies are then usually allowed to participate in future bonuses but only in so far as the bonus declared exceeds that anticipated.This class of business was first introduced in 1854, and eventually became popular with a section of the assuring public to whom the benefit of a with-profit policy at a minimum cost made a strong appeal. In the first instance the Discounted Bonus policy made its appearance in connection with a compound reversionary bonus system, but as it grew in popularity it was adopted by other offices and combined with the various methods of bonus distribution.