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
Date Written: January 23, 2020
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: Suggested Citation