Size, Growth, Profits, and Executive Compensation in the Large Corporation: A Study of the 500 Largest United Kingdom and United States Industrial Corporations

By David J. Smyth; William J. Boyes | Go to book overview

7 Variability of Profits
and Firm Size

I INTRODUCTION AND DATA

In this chapter, we investigate two questions for the 500 largest U.K. and U.S. industrial firms. First, when firms are grouped into size classes does the variability of profit rates between firms in each size class differ between groups? Secondly, does the variability of profit rates for firms in different size classes differ over time? To examine these questions, we use an analysis of variance approach. For the United States, we also present some evidence based on a comparison of time series for individual firms examining also the hypothesis that profit variability depends on concentration. Finally, for the United States, we see if there is a trade-off between profitability and the variability of profitability.

For the analysis of variance approach, we use sales as a measure of firm size. Because we are merely comparing variances and not estimating specific functional forms or elasticities, the problems raised in Chapters 2 and 3 concerning the measurement of firm size are avoided. As sales is the size measure by which firms are ranked in The Times 1000 and in Fortune 500, classification by sales provides the most simple separation into firm-size classes. In the latter part of the chapter, where regression analysis is used, it is necessary to repeat the regressions using all four measures of firm size, not just sales.

The U.K. data cover the three years 1969-70, 1970-71 and 1971-72; this part of the analysis was completed before 1972-73 data were available. The period 1969-72 was one of rather irregular growth - the rate of capacity utilisation fell and seasonally adjusted constant‐ price gross domestic product declined from the second half of 1970 to the first half of 1971. The data are from The Times 1000 and its predecessor, The Times 500.

The U.S. data cover the time period 1960 to 1968; this period was

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