Sustainable Competitive Advantage and Profitability Persistence: Sources Versus Outcomes for Assessing Advantage

Abstract

This paper explores how variables measuring firms' sustainable competitive advantages influence profitability persistence. Using a large sample of firms from MSCI 23 developed countries during 1985-2013, I find that an index of economic rents (such as size and market share) significantly reduce profit mean reversion, whereas traditional barriers-to-entry measures do not lower mean reversion. Higher previous long-term performance and sustained market share are associated with lower future mean reversion in profitability. Outcomes dominated sources of advantages, although both were useful in predicting future profitability persistence.

Keywords: mean reversion, return on assets, competitive advantage, sustained competitive advantage, barriers-to-entry, sustained market share

JEL Classification: M4, D4, G1