Do Profit Margins Expand for High Growth Firms?

Aytekin Ertan, Stefan Lewellen, and Jacob Thomas (2020) Do profit margins expand for high growth firms?. Journal of Management Accounting Research In-Press DOI:10.2308/jmar-18-079

45 Pages Posted: 19 Feb 2020

See all articles by Aytekin Ertan

Aytekin Ertan

London Business School

Stefan Lewellen

Pennsylvania State University - Department of Finance

Jacob K. Thomas

Yale School of Management

Date Written: January 23, 2020

Abstract

It is common in business analyses to invoke different efficiencies generated by scale. Growth is associated with declining average costs/sales and rising profit margins. Factors cited include the relatively fixed nature of some costs, increased bargaining power, and network effects. We investigate how different cost lines evolve for a sample of US firms after their IPO. To our surprise, costs/sales do not generally decline and margins do not increase, even during the early years when growth is highest. We observe similar results for other samples of domestic and overseas firms, both public and private. We explore possible explanations for our results and discuss implications, especially for cost allocation and financial projections.

Keywords: scale economies, scale efficiencies, average cost, marginal cost, fixed cost

JEL Classification: M41, M13, G30, D24

Suggested Citation

Ertan, Aytekin and Lewellen, Stefan and Thomas, Jacob, Do Profit Margins Expand for High Growth Firms? (January 23, 2020). Aytekin Ertan, Stefan Lewellen, and Jacob Thomas (2020) Do profit margins expand for high growth firms?. Journal of Management Accounting Research In-Press DOI:10.2308/jmar-18-079, Available at SSRN: https://ssrn.com/abstract=3524568

Aytekin Ertan

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
00442070008131 (Phone)

HOME PAGE: http://www.aytekinertan.com

Stefan Lewellen

Pennsylvania State University - Department of Finance ( email )

University Park, PA 16802
United States

Jacob Thomas (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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