Which Competitive Efforts Lead to Future Abnormal Economic Rents? Using Accounting Ratios to Assess Competitive Advantage

Journal of Business, Finance and Accounting, Forthcoming

59 Pages Posted: 10 Sep 2007 Last revised: 13 Feb 2012

See all articles by Victoria Dickinson

Victoria Dickinson

University of Mississippi - Patterson School of Accountancy

Gregory A. Sommers

Southern Methodist University (SMU) - Accounting Department

Date Written: February 11, 2012

Abstract

Strategy theory suggests that firms can impede mean reversion of economic rents by employing competitive efforts, thereby impacting profitability, forecasting, and valuation. We use realized operating performance to establish which competitive effort proxies effectively protect rents. The inclusion of competitive advantage proxies improves future accounting return forecasts and several efforts generalize across industries including power over suppliers and the credible threat of expected retaliation (Porter, 1980). Traditional barriers-to-entry proxies (product differentiation, innovation, and capital requirements) do not result in higher profitability once risk- and industry-adjusted. Finally, competitive efforts are not fully impounded into stock price, resulting in abnormal future returns.

Keywords: forecasting, earnings, economic rents, competitive advantage, profitability, persistence, mean-reversion, return on assets, industry-adjusted, risk-adjusted

JEL Classification: M41

Suggested Citation

Dickinson, Victoria and Sommers, Gregory A., Which Competitive Efforts Lead to Future Abnormal Economic Rents? Using Accounting Ratios to Assess Competitive Advantage (February 11, 2012). Journal of Business, Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1012856 or http://dx.doi.org/10.2139/ssrn.1012856

Victoria Dickinson

University of Mississippi - Patterson School of Accountancy ( email )

Conner 204C
University, MS 38677
United States
662-915-5448 (Phone)
662-915-7483 (Fax)

Gregory A. Sommers (Contact Author)

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-768-1188 (Phone)
214-768-4099 (Fax)

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