Do Digital Technology Firms Earn Excess Profits? Alternative Perspectives

The Accounting Review. Advance online publication. https://doi.org/10.2308/TAR-2021-0176

84 Pages Posted: 15 Dec 2020 Last revised: 3 Oct 2022

See all articles by Shivaram Rajgopal

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation

Anup Srivastava

University of Calgary - Haskayne School of Business

Rong Zhao

University of Calgary

Date Written: August 30, 2022

Abstract

Despite regulators’ allegations that digital technology giants misuse their market power to earn abnormal profits, there is a dearth of systematic work on (i) whether digital-tech firms in general, and tech giants in particular, earn excess profits; or (ii) whether their abnormal profitability, if any, is due to market power. We use two alternative measures of economic profitability in addition to accounting rate of return (ARR): internal rate of return (IRR), which equates current investments to their long-term payback, and return on invested capital (ROIC), whose numerator (profits) and denominator (invested capital) are adjusted for capitalized intangibles. Inferences based on IRRs differ from those based on ARRs and ROICs. IRRs show that the digital-tech sector is now the best-performing sector and its gap between profitability and cost of capital has increased over time. We are unable to separate the contribution of market power and innovation to digital tech’s high IRRs.

Keywords: Internal Rate of Return, Economic Profitability, Digital Giants, Anticompetitive Practices, Technology, Abnormal Profits, Amazon, Google, Microsoft, Apple

JEL Classification: D43, L1, M21, M41

Suggested Citation

Rajgopal, Shivaram and Srivastava, Anup and Zhao, Rong, Do Digital Technology Firms Earn Excess Profits? Alternative Perspectives (August 30, 2022). The Accounting Review. Advance online publication. https://doi.org/10.2308/TAR-2021-0176, Available at SSRN: https://ssrn.com/abstract=3739037 or http://dx.doi.org/10.2139/ssrn.3739037

Shivaram Rajgopal

Columbia University - Columbia Business School, Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Anup Srivastava (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

Rong Zhao

University of Calgary ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-2568 (Phone)
403-210-2217 (Fax)

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