U.S. Corporate Profit Margins, a Bottoms-Up Analysis: Deja Vu All Over Again

12 Pages Posted: 12 Nov 2014

Date Written: November 10, 2014

Abstract

As U.S. corporate profit margins have made it to record highs, a debate has raged between those who place their hopes on a new paradigm of sustained high profits and those who believe in capitalism’s efficiency and the tendency of margins to revert to the mean. Using a bottoms-up analysis framework, we show that an often-cited explanation for the new paradigm – that the U.S. economy is more service-focused – lacks empirical support. Our analysis rejects the hypotheses that higher profit margins are a result of technological progress or increased efficiency. Instead, we show that much of profit margin improvements are related to increased focus on improving earnings in the short-term.

Keywords: Investments, Profit Margins, Mean-Reversion, Corporate Profit, Gross Profit Margins, Efficiency, technological Progress

JEL Classification: D21, E22, E32, G31, H25, H32, L60, L80, L86, L90, M21, M31, M37, P10

Suggested Citation

Ramraika, CFA, Baijnath and Trivedi, Prashant, U.S. Corporate Profit Margins, a Bottoms-Up Analysis: Deja Vu All Over Again (November 10, 2014). Available at SSRN: https://ssrn.com/abstract=2522950 or http://dx.doi.org/10.2139/ssrn.2522950

Baijnath Ramraika, CFA (Contact Author)

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Prashant Trivedi

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