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 percent 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, profits, 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.
Details
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Author
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Document Date
2018/07/13
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Document Type
Policy Research Working Paper
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Report Number
WPS8534
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2018/07/13
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Disclosure Status
Disclosed
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Doc Name
Who are America's star firms?
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Keywords
intangible capital; Earnings Before Interest and Taxes; Return on Invested Capital; book value of asset; exercise of market power; invest capital; variable cost; industry concentration; return on asset; problem solving skill; linear probability model; variable input; measure output; barrier to entry; balance sheet information; providers of capital; portion of total; measures of price; accepted accounting principles; returns to capital; fundamental structural changes; skilled labor force; Type of Investment; venture capital partnership; cost of production; capital stock; human capital
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Citation
Ayyagari,Meghana Demirguc-Kunt,Asli Maksimovic,Vojislav
Who are America's star firms (English). Policy Research working paper,no. WPS 8534 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/109791531501183455/Who-are-Americas-star-firms