Who are America's Star Firms?
68 Pages Posted: 21 Aug 2018
Date Written: August 13, 2018
There is wide spread concern about a growing gap between top-performing publicly listed firms and the rest of the economy and the implications of this for rising inequality in the U.S. Using conventional return calculations, there is indeed a widening gap between star firms (defined as those in top 10% of return on invested capital in any year) and the rest of the economy over time, especially in industries that rely on a skilled labor force. However, once measurement error in intangible capital is accounted for, this gap shrinks dramatically and has not been widening over time. While pricing power, as measured by markups, predicts star firm status, a large fraction of star firms have low markups and there is no evidence that star firms are cutting output or investment more than other firms for the same markup. The effect of star status is persistent. Five years later, star firms have higher growth, pro ts, and Tobin's Q. A small subset of exceptional firms may pose more pressing policy concerns with much higher returns and the potential to exercise market power in the future.
Keywords: star firms, intangible capital, organizational capital, industry concentration, ROIC, capital expenditure
JEL Classification: G30, G31, G32, L22, L23, L25
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