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Determinants of Profitability: Evidence from US Firms

This study examines the determinants of profitability using the US Compustat database during the period 1976-2009. The study uses panel data analysis as Generalized Methods of Moments (GMM) dynamic panel models and Quantile regressions. Besides the conventional drivers of profitability a relatedness measure of technology based on patents is explored too, in order to account for information spillovers through the effects of networks and business activities through related or not technologies. The findings suggest that diversification is more likely to be successful within related activities sharing similar business lines and production chains. The drivers of profitability in lags are examined in order to account for their persistence on profitability, as well as their quadratic terms are considered to test for non-monotonic behaviour. In addition, the determinants of profitability are examined during economic recession and nonrecession periods. The overall results indicate that both firm and industry characteristics are important drivers for profitability. Therefore, managers should account for drivers who affect both the individual firm and the sector or industry where the firm is active.