Determinants of Profitability: An Analysis of Large Australian Firms
Melbourne Institute Working Paper No. 3/10
35 Pages Posted: 1 Jul 2010
Date Written: April 30, 2010
This paper identifies the determinants of firm profitability and quantifies their relative importance. Using a panel of large Australian firms for the period 1995 to 2005, the analysis estimates a dynamic profit model that, unlike most existing research, directly includes measures of productivity and productivity persistence. Descriptive statistics illustrate that the sample is characterized by a large amount of profit heterogeneity, and that substantial differences exist between industries and across firms. Estimation results indicate that firm profitability is predominantly determined by firm-level characteristics, and that sector effects are relevant, but to a much smaller extent. The analysis also reveals that, among firm effects, productivity and productivity persistence enhance profitability.
Keywords: Firm Performance, Determinants of Profit, Dynamic Panel Bias, Total Factor Productivity
JEL Classification: C23, D24, L25
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