Strategic Management Journal, Vol.

9, 415-430 (I 988)

L
THE PERSISTENCE OF ABNORMAL RETURNS
f---
ROBERT JACOBSEN
School of Business Administration, University of Washington, Seattle, Washington,
U.S.A.

The time-series behavior of ROI is examined to assess a central element of competitive

markets, the lack of persistence of abnormal profits. The analysis first determines the
aggregate dynamic process of ROI and then examines how strategic and market factors
influence this process. Consistent with abnormal returns resulting from a diseyuilbriirrn
phenomenon, a mean reverting time-series process approximates the behavior of ROI. While
a variety of factors influence the persistence of return, the conditions under which market
forces d o not drive return back to its competitive rate seem remote, if present at all.
Nonetheless, these factors can insulate a firm from competitive forces and so result in
longer-term abnormal profits.

INTRODUCTION competitive forces. But this insulation from

Sustaining a comparative advantage involves
undertaking strategies that not only generate an
abnormal level of return, but also insure its
persistence. Rates of return incommensurate with
the risk associated with the activities the firm
undertakes will disappear if a firm fails to cope
with or influence competitive forces. As such,
limiting those forces that drive return back to
competitive levels is fundamental to achieving
superior business performance.
A t any point in time a firm may earn what
can be regarded as abnormal profits. In a
competitive market this is a disequilibrium
phenomenon that results from such factors as
innovation, shocks in supply or demand, or
changes in tastes. Profitability, or the lack
thereof, signals the direction resources should
flow to satisfy customer demand. The adjustment
of resources and output into areas earning excess
profits and away from areas earning below
average profits will, in time, bring returns back
to competitive levels. If this adjustment does not
occur, or is slow, one has evidence of the ability,
or luck, of management to insulate the firm from
0143-2095/88/0504 15-1 6$08.00
01988 by John Wiley & Sons, Ltd.
competitive forces is not without risk. While the
slowing of the convergence process benefits
successful firms in that it allows them to earn
above-average profits for a longer period of time,
it results in longer-term, below-average profits
for unsuccessful firms.
The hypothesis that the behavior of markets
is sufficiently competitive so that abnormal profits
do not persist has generated a great deal
of discussion, and some empirical research.
Although conclusions differ as to whether profits
above and below the average dissipate com-
pletely, most studies find a convergence of profit
rates. However, the convergence process has
attracted relatively little attention. Typically, the
same rate of convergence is assumed implicitly
for all firms.
Yet this assumption may be inappropriate and
misleading. Wenders (1971) notes that persistence
is a relative term. He states that it is not merely
enough to show that abnormal profits dissipate
over time. For public policy and strategic purposes
the speed of the convergence process is the more
important issue. Firms may be in markets or may
implement strategies that can influence the time-
Received 2 7 Januar-y I986
Revised 31 A icgust 1987
416 R. Jacobsen
series process, and so the persistence of deviant
returns. Brozen (1971), while asserting that abnor-
mal returns dissipate, agrees that little information
on rates of movement of return towards equilib-
rium exists, and suggests that the ‘the sooner we
gather such evidence, the more quickly we will
be ready to carry on informed discussions of the
appropriate design of public policy’.
This paper investigates the persistence of
abnormal profits by examining the time-series
behavior of return on investment (ROI). Strategic
factors are examined to determine the extent
to which they help to sustain a comparative
advantage. A review of past research indicates
that opinions differ not only as to the factors’
extent, but also direction, of effect. Making use
of the Compustat and PIMS data bases, the
analysis first determines the aggregate time-series
process underlying the return series. Of special
interest is determining whether the series has
properties indicating that abnormal profits do
not dissipate. The second phase of the analysis
assesses the extent, if any, to which the time-
series process of return is associated with firm
and/or market conditions. This will indicate the
effectiveness of strategic actions in insulating a
business from the forces that bring profitability
back to its competitive level.
Consistent with the theory that abnormal
returns result from a disequilibrium phenomenon,
the results of this study indicate that a mean
reverting time-series process characterizes the
behavior of ROI. However, the behavior of the
ROI series indicates a relatively slow convergence
process. Firms are able to earn abnormal returns
for a substantial number of years. In addition, a
number of factors influence the persistence of
return. Vertical integration, market share, and
the intensity of marketing expenditure slow
the convergence process. Firms that implement
strategies that increase these factors tend to earn
longer-term abnormal profits.
ABNORMAL RETURNS
Abnormal return can best be described as
the difference between actual return and the
competitive return, i.e. the return just sufficient
to maintain capital investment. While clearly the
competitive return depends on the return of
alternative investment opportunities and their
relative risk, no one particular definition seems
widely accepted in the context of a business. In
the context of stock investment, the capital asset
pricing model (CAPM) serves as the most widely
used conceptual basis for determining abnormal
returns. CAPM defines the expected return to
be equal to the risk-free rate plus beta, a factor
reflecting the systematic risk of the investment,
times the expected value of the difference
between the market return and the risk-free
return, i.e. E(Rj,)=Rf,+ /3,*E(Rmf-Rf,).Abnor-
mal returns, more commonly known as unsystem-
atic returns in the finance literature, are defined
as the deviation of return from this expected
return.
However, differences between investment in
stocks and investments in products have led some
to question CAPM as the appropriate means
of adjusting for the business risk, (Devinney,
Stewart, and Shocker, 1985). Others question
whether CAPM is even appropriate in the
context of stock market investments (Roll, 1977).
Because of this conceptual difficulty, and because
of the empirical problems associated with estimat-
ing risk at the business level, most studies analyze
abnormal return by studying the behavior of total
return, i.e. the effect of risk is not controlled.
The behavior of total return is assumed to
approximate the behavior of abnormal returns.
The use of total returns instead of unsystematic
returns is the same as modeling the expected
return to be the same across all firms. As firms’
expected returns differ with their differing risk
levels, potential problems can arise from this
widely used practice. Christie (1984) casts the
problem in terms of running a least-squares
regression when a random coefficient model is
actually appropriate, i.e. inappropriately assum-
ing constant coefficients across observations. A
least squares regression yields unbiased coefficient
estimates even under this condition if the
deviation of the random coefficient from its
sample mean is uncorrelated with the independent
variables in the model (Theil, 1971).
As the deviation of expected return from the
sample mean depends on beta, the validity of
using total return depends on the extent to which
beta is correlated with the independent variables.
The beta for a firm may be associated with
strategic factors (Bettis, 1982). However, beta
depends primarily on the nature of the business
area. Its association with strategic factors, and

therefore the bias in the least square estimates,
can be assumed to be small. While this study
initially assumes that the behavior of abnormal
returns approximates the behavior of total return,
it will also test this assumption.
FACTORS POTENTIALLY
INFLUENCING THE PERSISTENCE OF
ABNORMAL RETURNS
While past research has focused primarily on the
effects of marketktrategic factors on the level of
return, some researchers have analyzed the
dynamic behavior of profitability. Past research
indicates a convergence of rates of return and
highlights a number of factors thought to influence
the convergence process. These factors are
industry concentration, market share, profit-
ability, vertical integration, marketing expendi-
tures, and barriers to market entry and exit.
Studies by Brozen (1970) and Beaver (1970)
report a convergence of profit rates. Challenging
the conclusions of Bain (1951) and others, who
hold that concentration leads to higher rates of
return, Brozen (1970) tests whether profit rates
return to competitive levels over time. He
compares industry profit levels by level of
concentration for the period 1936-40 to their
profit rates in the 1953-57 period. He finds that
profit differences associated with the level of
concentration existing in the first period become
negligible in the second. Profit rates in industries
with high rates of return decline, and those in
industries with below-average return increase,
regardless of concentration. Brozen interprets
this evidence to indicate abnormal returns are a
disequilibrium phenomenon.
Beaver (1970) divides a sample of firms into
two groups based on having high and low return.
He finds that future returns increase (decrease)
for the low (high) grouping. The mean for these
groupings equilibrates in approximately 8 years.
While Brozen suggests the convergence process
takes time as adjustments are made in the market,
Beaver suggests this convergence is consistent
with an underlying process which is immediately
mean reverting but with correlated measurement
error. The accounting measurement process can
induce a substantial amount of serial correlation
into even a serially independent earnings series.
While investors’ immediate reaction to new
Persistence of Abnormal Returns 417
information produces this type of instantaneous
reversion in the stock market, Beaver fails to
indicate the mechanism(s) that permit firms to
adjust this rapidly to changes in conditions in a
business context.
Subsequent studies support the notion of
returns converging. For example, Branch (1980)
finds, based on an analysis of deviations of ROI
from the estimate of PAR ROI obtained from
the Strategic Planning Institute ROI model,
abnormal returns dissipating and moving towards
the PAR level. He suggests random transitory
factors may cause a business’s return to differ
markedly from that dictated by the long-run
relationships. But he fails to note that the PAR
ROI series itself, like ROI, exhibits decay;
therefore, it cannot be regarded as a long-run
equilibrium profit rate for a firm.
These studies assume the same convergence
pattern across firms and do not attempt to
determine if inter-firm differences exist. A wide
variety of factors can be hypothesized to influence
the time-series behavior of return. While no study
has systematically addressed the factors that may
influence the durability of profitability, past
research suggests a number of potentially relevant
factors.
The greatest amount of research and discussion
on the topic of the persistence of abnormal returns
centers on the role of industry concentration.
Scholars have theorized that a high level of
concentration permits easier (less costly) col-
lusion. Collusion; in turn, suppresses internal
competition and limits the inflow of resources.
Monopolistic industries are thought capable
of preserving their preferential position for
considerable periods of time. Conversely, com-
petitive industries experience a constantly chang-
ing hierarchy of rates of return and therefore a
less persistent return.
Stigler (1963) reports findings that suggest the
convergence of profitability occurs more slowly
in concentrated industries. He observes that
between the periods 1947-48 and 1953-55,
concentrated industries with profits above the
mean had their profits fall by 44.8 percent while
unconcentrated industries with profits above the
mean experienced a profit fall of 59.6 percent.
In addition, he finds consistently higher autocorre-
lations for returns in concentrated industries than
in unconcentrated industries. While he states ‘the
pattern of coefficients agrees remarkably well
418 R . Jacobsen
with the hypothesis’, no formal hypothesis test
is presented. Using the ‘rule-of-thumb’ standard
error of (Usample size)*, the null hypothesis of
no difference between the concentrated and
unconcentrated industry autocorrelations cannot
be rejected. However, the pattern is suggestive
enough to warrant further tests, but with a larger
sample size to allow for greater power in testing
the hypothesis.
The potential influence of concentration on
the persistence of return relates to entry and exit
barriers. Qualls (1974) investigates the profit
margins of 30 industries for the periods 1950-60
and 1961-65. He observes that above-average
profit margins fall for both industry groups
classified as having high entry barriers as well as
for those having low entry barriers. However, a
proportionally slower decline occurs for those
industries having high entry barriers. Scherer
(1980) suggests that ‘one should indeed expect
to see especially profitable firms’ returns decline
unless entry barriers are sufficiently high to
warrant a consistent entry deterrent or exclusion-
ary pricing strategy’. But rates of return should
converge even with entry barriers. This conver-
gence occurs as firms already in the industry
expand output and copy the strategies of the
highly profitable firm(s). However, both entry
and exit barriers can be hypothesized to slow the
convergence process.
A number of studies, e.g., Gale and Branch
(1982), Ravenscraft (1983), find that after taking
into account the impact of market share, industry
concentration has little, if any, role in explaining
differences in the level of firm profitability. This
same phenomenon might be present with respect
to the persistence of profitability. Mills and
Schumann (1985) find, on the basis of a sample
of 856 manufacturing firms for the period 197G80,
that sales volatility is negatively correlated with
market share. Apparently, smaller firms survive
by having the flexibility to expand and contract
with industry-wide output fluctuations. This nega-
tive association may also reflect the market power
advantages created by market share. Firms with
a large share may seek to take part of their
supranormal profits in the form of avoiding
uncertainty. They use their market power to
obtain more stable and persistent profits.
Mueller (1977) forms eight groupings of firms
based on their initial profit rates, and tests
whether the probability of a firm remaining in
its initial profitability grouping over time is
independent of its initial grouping. He rejects
this hypothesis in favor of the alternative hypoth-
esis that profits earned in one period provide
resources to maintain profits in the future.
Firms starting out with the highest and lowest
profitability levels have a greater than expected
probability of remaining in their initial grouping.
Conversely, firms in the center of the distribution
have a greater than expected probability of
movement out of the center. Thus, movement
out of the initial grouping is much more likely
for firms starting towards the center than if the
firm started towards the tails of the distribution.
This suggests differing convergence patterns
based on the level of return.
The level of vertical integration potentially
influences the persistence of return. A vertically
integrated firm has better control over both
supply and demand. The competitive pressures
associated with dealings with upstream and
downstream firms, hence some of the forces that
tend to eliminate abnormal returns, are reduced.
Vertical integration may also increase the persist-
ence of return because the commitment of
resources into a specific area reduced the
flexibility of the firm, (Aaker and Mascarenhas,
1984). However, it can lead to less persistent
returns since the firm might be more subject to
market-specific and economy-wide fluctuations.
The question of whether marketing expendi-
tures, particularly advertising expenditures,
influence the persistence of returns generates
~
sharp differences in opinion. Opinions differ not
only about whether marketing expenditures have
an effect, but also about whether they promote
or hamper competition (Farris and Albion, 1980).
One view asserts that marketing expenditures
create brand loyalty through product differen-
tiation. This insulates a firm from competitive
forces and results in more persistent returns. The
alternate view is that marketing expenditures
decrease the persistence of returns since they
allow customers to better compare products
and create a competitive rivalry. Marketing
expenditures increase competition to the extent
they provide information and induce trial.
As the persistence of abnormal returns involves
the broad domain of factors influencing compe-
tition, numerous factors can be hypothesized to
have an influence. However, past research
highlights a relatively select group of variables

thought central to the competitive process.
Strategic and public policy concerns with the
persistence of return have focused on the effects
of industry concentration, market share, the
level of the rate of return, vertical integration,
marketing expenditure intensity, and whether
entry or exit has occurred in the market.
DETECTING THE CONVERGENCE
PROCESS OF RETURN
Two hypotheses are of primary interest in
assessing the persistence of abnormal returns.
They are:
H I : Abnormal returns do not completely
dissipate.
H2: Strategiclmarket factors are unable to
influence the persistence of abnormal returns.
Modeling the time-series behavior of return, and
determining if the model is mean reverting,
provides a test of the first hypothesis. In testing
this hypothesis, one also tests the diametrical
hypothesis that abnormal returns dissipate
immediately, i.e. that abnormal returns are
transitory shocks that exist in a given period but
dissipate by the next period of observation. The
analysis also provides information about the
intermediate question of whether abnormal
returns dissipate relatively quickly or slowly.
The second hypothesis involves assessing
whether the time-series process of return is
exogenous. Alternatively, strategic factors might
influence the process. This analysis involves
determining whether there are special cases where
abnormal returns d o not dissipate, o r whether
certain factors influence the convergence process.
The literature on abnormal returns highlights a
number of factors that potentially influence the
persistence of return; although these studies
disagree about the extent, and sometimes even
about the direction, of the effect. This analysis
provides insights about what managers can do to
help insulate their firm from the forces that drive
return back to its competitive level.
A first step in examining the persistence of
abnormal returns is to ascertain and model the
aggregate time-series behavior of return. In
order to examine the time-series properties
characterizing the return series, an autoregressive
model of order p for the ROI series is estimated.
Persistence of Abnormal Returns 419
This model is of the form:
ROI;, = c + ~,*RoI,~-,
+ +**ROIjt-Z
+ 43*ROI,t-3
+ . . . + ~,,,*ROIir--p+
After identifying and estimating the autoregress-
ive model, tests are performed to determine if
the series is stationary or if the series has a unit
root. For a stationary series, requiring that: 4,
+ 42 + +3 + . . . +,,
< 1 , abnormal returns
dissipatekonverge t o some ‘long-term’ level. The
closer any of the roots are to 1.00, the more
persistent the abnormal profits. If the series has
a unit root, i.e. a root of the characteristic
equation +(B)=O lying on the unit circle, then
abnormal returns will not dissipate completely.
A second series of tests determine which
strategic variableslmarket conditions, if any,
influence the convergence process. This is done
by allowing the autoregressive coefficients to vary
depending on the level of industry concentration,
market share, rate of return, vertical integration,
marketing expenditure intensity, and whether
entry or exit has occurred in the market. Factors
that decrease the persistence of the return series
promote competition, and factors that increase
the persistence of return hamper competition.
DATA
The accounting return data used in this analysis
come from two separate data bases. The primary
sample is the PIMS (profit impact of market
strategy) data base of the Strategic Planning
Institute. PIMS provides annual data for over
2000 business units reporting for all or parts of
the period 1970-83, over 13,000 observations in
total. These business units are components of
the approximately 200 firms participating in the
PIMS project. The PIMS project defines a
‘business unit’ as a division of the firm ‘selling a
distinct set of products to an identifiable set of
customers in competition with a well-defined set
of competitors’. By use of a standardized form,
’ The analysis examines the extent and persistence of
abnormal returns, i.e. returns different from a presumed
long-term rate. However, given ambiguities in the theoretical,
and especially the empirical analysis, no attempt is made to
determine if this long-term rate is in fact the ‘Competitive’
rate of return.
420 R. Jacobsen
business units report annual income statement
and balance sheet information. The advantage of
the PIMS data base is that it contains not
just this information, but also information that
pertains to the market environment and the
strategic choices made by the SBU. The PIMS
data base can be used both to model the aggregate
time-series process characterizing the return series
and to determine the potential impact of strategic
factors on this process.
A disadvantage of the PIMS data base is that
it covers a relatively short time span. While a
few firms report for the entire 13 year period,
most firms supply information for just 5 years.
This relatively brief period may be insufficient
to adequately uncover the dynamic pattern of
profitability. Standard and Poor’s Compustat data
files, on the other hand, provide 20 years of
annual income statement and balance sheet
information for industrial, and some non-indus-
trial, companies listed on the New York and
American Stock Exchanges. The longer time-
series data offer a greater opportunity to study
the time-series behavior of ROI, since this allows
for more powerful diagnostic tests.
Additionally, Compustat data can be matched
with stock price information reported in the
University of Chicago’s Center for Research in
Security Prices (CRSP) data tapes. This matching
allows for the opportunity to uncover stock
market participants’ perceptions of the dynamic
pattern of accounting return. The concept of
efficient markets implies that market participants
incorporate all predictable information about
profitability into the price of the stock. Only
unanticipated information should be correlated
with stock price movements. As a minimum it
can be assumed that the market has made use
of the time-series behavior of return. This time-
series behavior assumed by market participants
can be uncovered by finding the autoregressive
coefficient(s) that produce the residual ROI series
Table 1. Autocorrelation of ROI: pk=Corr (ROI,,, ROI,,-k)
k 1 2 3 4 5 6 7
Pk 0.83 0.70 0.64 0.62 0.62 0.60 0.55 0.49 0.49 0.50 0.51 0.52 0.49 0.46 0.46
Notes
As these autocorrelations are based on pooled time-series and cross-sectional data. the number of observations is reduced
by the number of firms in the sample for each successive lag taken. Thus, the estimated standard error, under the null
hypothesis of no relationship, is calculated as: (I/(( 19-k)*241))1’2. The standard errors range from 0.0015 for the first-order
autocorrelation to 0.0032 for the fifteenth-order autocorrelation.
that has the highest correlation with stock return.
This provides another indication, independent of
the time-series modeling process, of the dynamic
process of ROI. A total of 241 firms met the
criteria of being in both the Compustat and
CRSP data files for the entire 20 year period
1963-82, and of having a fiscal year ending in
December.*
The Compustat data base is limited to the
extent that it reports only corporate-level data,
i.e. it aggregates SBUs together. Further, it lacks
important strategic information about a firm’s
operations. Given the heterogeneity of the
SBUs comprising a corporation, this information
probably has little meaning at the corporate level
anyway. So, while the analysis based on the
Compustat data base provides evidence about the
dynamic pattern of R 0 1 , it does not allow for
the analysis of factors influencing the persistence
of profitability.
THE DYNAMIC PATTERN OF
CORPORATE-LEVEL ROI
Analysis via time-series methods
In a pure time-series context, Box and Jenkins
(1976) suggest that the autocorrelation function,
i.e. the correlation between observations at
period t and t - k , provides insights into the
pattern of a series. This type of analysis can
provide similar insights about the dynamic
behavior of pooled, time-series cross-sectional
data. Table 1 reports autocorrelations of the
ROI series, calculated on the basis of annual
Compustat data.
* Only 19 years of data are available from the 20 years of
observations due to the use of book value of assets in period
t-1 in the denominator of ROI.
8 9 1 0 1 1 1 2 1 3 1 4 1 5
 Persistence of Abnormal Returns 421

The decay pattern of the autocorrelations suggests differences in profitability assume away the role
that a first-order autoregressive process, i.e. of risk. However, a number of studies in finance
an AR( 1) model, approximates the time-series and accounting assessing the properties of return,
behavior of ROI. Although, as this model implies, e.g. Ball and Brown (1968), base their analysis
the kth order autocorrelation will be 0.83k, the on unsystematic return instead of total r e t ~ r n . ~
decay appears less rapid than would be expected Unsystematic return, which adjusts for differences
given the first-order autocorrelation of 0.83. in risk, is the theoretically superior indicator of
Equation (1.1)presents the results of estimating abnormal returns. Comparison of the time-series
an AR(1) modeI. behavior of unsystematic return with the time-
series behavior of total return provides some
ROI,, = 0.986 + 0.835*ROIir-, + E,,
std. error (0.082) (0.009) insights into the validity of the practice of
assuming that total and unsystematic return have
R2=0.66 No.of obs. =4338
similar properties.
(1.1) An unsystematic return measure is calculated
As evidenced by the R2 of 0.66, the model as :
displays a substantial amount of explanatory
roiil= RO1,- Pi*ROI,,
power. However, analysis of the residuals indi-
cates that they do not approximate white noise. where:
Significant associations exist at some higher-order
ROIi, = return on investment of firm i in
lags. Although significant , modeling these higher-
period t ;
order associations provides only a modest
incremental contribution to explanatory power. Pi = estimated beta of firm i derived from
accounting data;5
For instance, AR(2), AR(5), and AR(10) models
ROI,,, = average return on investment of all
yield R2 values 0.2, 3 and 5 percent higher,
firms in the sample in period t .
respectively, than those found for an AR( 1)
model. In addition, parameter estimates of the Analysis of the autocorrelations of unsystematic
higher-order lags varied substantially for different return suggests a time-series behavior similar to
subsamples of the data. This might indicate that that of total return. However, the autocorrelations
the significance of higher-order lags reflect only of unsystematic return exhibit a higher level of
the peculiarities of specific data periods. An correlation than the autocorrelations of total
AR( 1) model seems an adequate, parsimonious return. Unsystematic return’s higher level of
representation of the series. correlation apparently reflects the removal of
The hypothesis that ROI has a unit root instability caused by -economy-wide fluctuations.
can be r e j e ~ t e d The
. ~ autoregressive coefficient The fact that the autocorrelations do not decay
estimate of 0.835 differs significantly from 1.00. quickly, if at all, suggests that the series may
This indicates that while abnormal returns decay have a unit root. This would indicate that firms’
relatively slowly, they do in fact decay. abnormal unsystematic returns do not dissipate.
However, the implications drawn from equation Of course, a first-order autoregressive model
(1.1) are potentially limited, since risk differences with a coefficient close to 1.00, kdicating a slow
are not controlled in the analysis. Differing levels decay of abnormal returns, might still adequately
of return may not reflect abnormal returns, but represent the series.
rather the fact that investments with higher levels Equation (1.2), reporting the estimation of an
of risk require higher return. With relatively few AR( 1) model for unsystematic returns, suggests
exceptions, previous studies assessing inter-firm

Unsystematic return is defined as the difference between

Special problems surround testing the specific null hypothesis
of a series having a unit root, (Dickey and Fuller, 1979;
Evans and Savin, 1981) Many of the alternative tests, while
consistent, exhibit bias and low power. The very large sample
size used to estimate equation (1.1). as well as the extent of
the difference of the estimated autoregressive coefficient
from unity, overcomes these problems.
total return and the expected return as indicated by economy-
wide conditions and the beta of the firm.
’ The accounting beta estimates reflect the association of a
firm’s return with the market return, as measured by the
average ROI for the sample of Compustat firms. See Beaver
and Manegold (1975) for a discussion of theoretical and
empirical issues in estimating betas on the basis of accounting
data.
422 R . Jacobsen
this to be the case.
roi,=0.073 + 0.898*roii,-, + E;,
std. error (0.044) (0.007)
R2=0.78 No. of obs. = 4338 (1.2)
The hypothesis that the series has a unit root
can be rejected. The autoregressive coefficient
estimate of 0.898 is statistically different from
1.00. Much like the AR(1) model for total return,
the AR(1) model for unsystematic return does
not produce white noise residuals, but the
modeling of additional parameters fails to substan-
tially increase the explanatory power of the
model. An AR(1) model appears to be an
adequate, parsimonious representation of the
time-series process of unsystematic return.
Analysis via stock market participants'
perceptions
Analysis of stock price data provides additional
evidence about the time-series process governing
return. The notion of market efficiency implies
that the price of the stock reflects all anticipated
information about profitability contained in ROI.
Only the unanticipated component of ROI should
exhibit an association with changes in stock
prices. It can be expected that the market has
incorporated the information that has led to
the time-series pattern of ROI. The market's
perception of the time-series behavior of return
can be determined by finding the autoregressive
coefficient producing the residual series, i.e.
unanticipated ROI, with the highest correlation
with stock return.
In order to determine this coefficient, the first-
order autoregressive parameters ranging from
0.00 to 1.00 are examined to determine which
coefficient produces the residual return series
exhibiting the strongest correlation with stock
return.6 The coefficient 0.88 yields the highest
correlation, i.e. 0.272, of residual ROI with stock
return. Autoregressive coefficients further away
from this value produce residual series that
That is, for the model ROI,, = a + +,*ROI,,_,+ E,, a
search is undertaken to find the parameter I$,'""" that
produces the residual series c,,"'"~ such that the correlation
between E,, and stock return is maximized.
exhibit a smaller correlation with stock return,
i.e. the loss function is quadratic. For example,
a coefficient of 0.00, i.e. the ROI series itself,
produces a correlation of 0.141 and a coefficient
of 1.00, i.e. first differences, produces a corre-
lation of 0.267. A similar finding is observed for
the association of residual unsystematic ROI with
unsystematic stock return. The coefficient 0.83
maximizes the correlation with a value of 0.399.
The coefficients 0.00 and 1.00 produce series that
have correlations with unsystematic stock return
of 0.234 and 0.376, respectively.
The correlation between unanticipated ROI
and stock return highlights two key aspects of
the return series. First, it contradicts claims that
ROI is a totally inadequate indicator of business
performance, (e.g., Fisher and McGowan, 1983).
Information contained in ROI has a commonality
with stock return, a universally accepted measure
of performance.' Second, it is through the
utilization of the time-series behavior of ROI
that the information content of ROI that stock
market participants deem most relevant can be
extracted.
The autoregressive parameters indicated by the
empirical analysis of the data correspond closely
with what the market perceives as the time-series
behavior of accounting ROI. The estimated
residual series obtained using the autoregressive
coefficient estimate indicated by the time-series
modeling process comes extremely close to
maximizing the correlation with stock return.x
The two methods of analysis differ about whether
unsystematic or total return is more persistent,
but the differences are small enough to suggest
that both are characterized by similar, if not
identical, time-series processes. Both methods
suggest that an AR(1) model with an autoregres-
sive parameter of around 0.85 approximates the
time-series process followed by the ROI and
unsystematic ROI. The lack of a unit root implies
that abnormal returns dissipate. However, the
~
' Jacobson (1987) provides a more detailed discussion of the
validity of ROI as evidenced by its association with stock
return.
tiAdded justification for the use of an AR(1) model comes
from the fact that higher-order filters failed to produce a
residual series with a stronger association with stock return.

size of the autoregressive coefficient indicates a
relatively slow convergence process.
Inter-firm differences
The preceding analysis assumes, perhaps incor-
rectly, that the same process characterizes the
time-series behavior of return for all firms. Inter-
firm differences in the behavior of the ROI series
may exist. To test this hypothesis, individual
AR(1) models are estimated for each firm, i.e.
a pure time-series AR( 1) model on the 18 years
of available data is estimated for each firm. A
Chow test is then used to test the hypothesis that
all the parameters are the same across firms. The
null hypothesis that every firm has the same
AR(1) model is rejected. However, the hypothesis
that the firms have the same autoregressive
coefficient, although with different intercepts,
cannot be rejected. This same finding is observed
for unsystematic ROI.
This suggests that firms are unable to influence
the stability of abnormal profits since the same
time-series process characterizes the return series
of all firms. However, this conclusion may be
unwarranted. The estimation of the AR(1) models
for each firm utilizes just 18 annual observations.
As a result, the standard errors of the coefficient
estimates are relatively high, so that the power
of testing for differences in coefficients is relatively
low. In addition, the corporations reported
in the Compustat data base are comprised of
heterogeneous business units. Analysis of these
corporations may mask SBU level associations.
THE DYNAMIC PATTERN OF SBU-
LEVEL ROI
Analysis of the dynamic pattern of ROI at the
SBU level can be accomplished through the use
of the PIMS data base. The estimated AR(1)
modeling results, reported in equation (2. l ) , are
similar to that observed at the corporate level
and reported in equation (1.1).
ROIil= 6.429 + 0.772"ROIjI-, +
eir
std. error (0.258) (0.006)
R2=0.60 No. of obs.=10053 (2.1)
The explanatory power of the model and the
autoregressive coefficient are slightly less than
Persistence of Abnormal Returns 423
that found for corporate-level data. The results
are consistent with both depicting the same
underlying process of ROI, but with corporate-
level data aggregating away variation associated
with business unit activity. Lagged ROI exhibits
considerable explanatory power. It apparently
has substantially more power than any other
predictor of current profitability. In addition,
these other predictors make only a marginal
incremental contribution to explanatory power.
To illustrate, a regression of ROI on the Strategic
Planning Institute estimate of PAR ROI, i.e. a
prediction of ROI based on 32 variables depicting
conditions of the SBU, yields an R' of 0.3. A
joint regression of ROI on lagged ROI and PAR
ROI produces an R2 of 0.65. Clearly lagged ROI
contains a substantial amount of information
concerning current profitability that is not
reflected in other variables. Modeling the dynamic
process characterizing the return series increases
the accuracy of profitability predictions.
The ability to test for and model differences
in the persistence of abnormal returns relates
closely to the issue of whether the PIMS time-
series and cross-sectional data can be pooled.
The relatively small number of time-series obser-
vations available for each firm limits the ability
to test/model this issue. Most of the widely used
procedures for pooling time-series and cross-
sectional data, e.g. random coefficient models,
require that separate time-series models be
estimated for each firm, or at least that a large
number of time-series observations be available.
With so few time-series observations available
in the PIMS data base, the variance of the
autoregressive coefficient estimated for any given
firm will be extremely large. The ability to reject
the null hypothesis of all the coefficients being
the same is therefore low.
Methods for pooling time-series and cross-
sectional data assume an underlying aggregate
coefficient exists across all firms after controlling
for some factor(s). Equation 2.2 is formulated
based on the premise that after controlling for
various markethtrategic factors an aggregate
autoregressive coefficient exists across firms. This
equation has the advantage of requiring relatively
few time-series observations to assess the influ-
ence of strategidmarket factors on the persistence
of profitability. The equation allows differing
associations between ROI and lagged ROI
424 R. Jacobsen

depending on industry concentration, market DuMrkInt =dummy variable indicating

share, vertical integration, marketing expenditure upper quintile of marketing
intensity, rate of return and dummy variables intensity
that indicate whether entry and exit has occurred DlMrkInt =dummy variable indicating
in the market. lower quintile of marketing
intensity
ROIt=6,j+61*ROI,- I +6,*(ROIt-1 “DuROIt- I ) Entry = dummy variable indicating
+6,*(ROIt-,*D,ROI,~,) + &,*Conc,+ market entry has occurred in a
6,*(ROI,- *DuConc) + 6,*(ROI,- *DlConc) previous period
+ S,*MS, + 6,*(ROI,-I*DuMS) + Exit =dummy variable indicating
69*(ROI,-1*DIMS) + Slo*VertI, + 611*(R01, market exit has occurred in a
-,*DuVertI) + 6,,*(ROI,-,*DIVertI) +
previous period
6,,*MrkIntt + 614*(ROIt-1*DuMrkInt) +
615*(R01t-1*D1Mrk1nt) The influence of these factors on the time-
61,*(Ro1f-,*Entry) + 618*Exit + sI,*(Rolt-l
+ +

series behavior of ROI is analyzed by creating

*Exit) + E,
,--, variables that involve the interaction between
lagged ROI and dummy variables.
where:
These dummy variables indicate whether the
ROI, = return on Investment in period SBU is in the top or bottom quintile of the
t distribution for each of the variables.’ The
RO1,- I =return on Investment in period coefficients for these variables show whether the
t- 1 autoregressive coefficient is higher, lower or
D U R O I , - ~ =dummy variable indicating inconsequentially different when the firm is in
upper quintile of lagged ROI the top or bottom quintile of the distribution as
in period t-1 compared to when it is in the middle of the
DIRO1,- 1 = dummy variable indicating distribution. Positive coefficients mean that the
lower quintile of lagged ROI convergence process is slowed. Negative coef-
in period t-1 ficients indicate the process is accelerated. The
Conc, =served market concentration in model also allows the factors themselves to have
period t a direct effect on ROI so that ‘slope and intercept’
DuConc = dummy variable indicating effects will not be confused. Table 2 reports the
upper quintile of market results of estimating this model. 1o
concentration The extremely large sample size overcomes the
DlConc =dummy variable indicating collinearity problem associated with estimating a
lower quintile of market model with many correlated variables and a
concentration lagged dependent variable that explains a great
MSt =market share in period t deal of variation. Correlation between lagged
DuMS = dummy variable indicating ROI (or, for that matter, any factor in the model)
upper quintile of market share and the other variables in the model still allows
DIMS = dummy variable indicating for consistent estimates of the coefficients and
lower quintile of market share standard errors, but larger standard errors result.
VertI, =vertical integration (value The inclusion of potentially irrelevant variables
addedlsales) in period t in the model, as indicated by insignificant
DuVertInt =dummy variable indicating
upper quintile of vertical ’Dummy variables are used to investigate the influence of
integration marketktrategic factors on the persistence of R 0 1 , instead
of modeling the effects to be a linear function, so as to allow
DlVertInt = dummy variable indicating
for the detection of effects that have been hypothesized to
lower quintile of vertical be asymmetric.
integration “’ The analysis was also performed with different cut-off
MrkInt, =marketing expenditure levels for the dummy variables, e.g. variables indicating
whether the firm is in the upper or lower third of the
intensity (marketing distribution. Results from this analysis are consistent with
expenditurekales) in Deriod t the results reoorted in Table 2.
 Persistence of Abnormal Returns 425

Table 2. Influence of strategic factors on the persistence of

ROI; dependent variab1e:ROI

Standard
Coefficient Error

Constant -3.995"** 1.132

Lagged ROI 0.81 1:ii :k * 0.020
Lagged R0I:low ROI - 0.472" * * 0.031
Lagged RO1:high ROI -0.024 0.016
Concentration -0.016 0.012
Lagged R0I:low concentration -0.000 0.017
Lagged RO1:high concentration -0.021 0.012
Market share 0.088" * * 0.015
Lagged R0I:low market share -0.068:@*:ii 0.016
Lagged R0I:high market share 0.045 :ii :ii :k 0.014
Vertical integration 22.270%* * 1.550
Lagged RO1:low vertical
integration -0.023 0.016
Lagged ROI: high vertical
integration 0.060** * 0.012
Marketing intensity -55.310" * * 2.840
Lagged RO1:low marketing
intensity - 0,046:k* * 0.013
Lagged RO1:high marketing
intensity 0.063* * * 0.013
Entry 0.591 0.565
Lagged RO1:entry -0.014 0.013
Exit -0.371 0.606
Lagged RO1:exit -0.050:'* 0.017

RZ=0.64; no.of observations= 10053.

***Significant at the 99.9 percent confidence level;
* * significant at the 99 percent confidence level.

coefficients, also allows for consistent estimates
of the coefficients and standard errors, but with
larger standard errors, (Theil, 1971). The large
sample size compensates for these problems and
the estimated standard errors are quite small.
The coefficients are either highly significant or,
for the most part, very small and insignificant.
All but one of the significant coefficients is
significant at the 99.9 percent confidence level.
Lagged ROI offers the most power in explain-
ing, as measured by contribution to R2, current
ROI. After controlling for slope and intercept
differences arising from the different strategic/
market conditions, the coefficient for lagged ROI
(0.810) corresponds closely with that found at
the corporate level. However, this coefficient
differs significantly for a number of strategic/
market conditions.
The autoregressive coefficient estimate differs
significantly for firms with low ROI, but not for
firms with high ROI. As evidenced by the
coefficient estimate of -0.47, far and away the
largest difference in the autoregressive coefficient
occurs for firms with low ROI in the previous
period. This indicates that firms with low ROI
in the previous period have an autoregressive
ROI coefficient of 0.34, as compared to the
coefficient of 0.81 for firms with lagged ROI
in the center of the distribution. This lower
autocorrelation is consistent with the findings of
Branch (1980), who suggests that this is because
a business will exert strenuous efforts to raise
ROI when its ROI is low. Low ROI in the
previous period seems to create conditions in
which a firm willingly makes dramatic and
perhaps risky modifications in strategy that can
cause changes in future ROI, be they positive or
negative. Alternatively, a firm with low ROI may
not have resources, luck, ability, or desire to
insulate itself from competitive forces. The
insignificant autoregressive coefficient for high
ROI (-0.024), indicates that high ROI, in and
426 R. Jacobsen
of itself, does not lead to more persistent returns
than average ROI.
Concentration influences neither ROI nor its
persistence. The coefficient for the impact of
served market concentration on ROI is both
small (-0.016) and insignificant. As evidenced
by the coefficient estimates of -0.000 and -0.021
for lower and upper quintile concentration,
respectively, the same is true for the impact of
concentration on the persistence of profitability.
Failure to control for factors inducing a spurious
correlation can explain the significant impact of
concentration on profitability and its persistence
observed in past research. Bivariate analysis of
the effects of concentration indicate significant
positive effects on both the level and persistence
of return. If the effect of lagged ROI is not
controlled, a greater effect of concentration on
ROI is observed. As the multivariate analysis
fails to allocate any influence to concentration,
these significant results observed in bivariate
analysis can be considered spurious correlations
arising from omitted variable bias."
Concentration's lack of influence is tied not
only to the influence of lagged ROI but also to
market share. The market share variable better
reflects information, which to some extent is also
contained in the concentration variable, that has
an effect on the level and persistence of return.
As indicated by its coefficient estimate of 0.088,
market share has a significant effect on the
level of profitability. However, consistent with
Jacobson and Aaker (1985), this estimate of the
market share effect is substantially smaller than
the commonly assumed impact of 0.5 (Buzzell,
Gale and Sultan, 1975). This reduced estimate
can be explained by the role of lagged ROI,
serving as a proxy for firm-specific factors that
are typically omitted from most profit models,
in reducing spurious correlation.
However, market share has an influence on
profitability aside from its direct effect. Market
share induces greater persistence in ROI. As
evidenced by the coefficient estimates -0.068
and 0.045, low market share firms have less
persistent returns and high market share firms
have more persistent returns. If, as Mancke
" Additional tests to ascertain if delayed and/or carry-over
effects are present found no evidence to suggest impacts
different from those reported in Table 2.
(1974) and Jacobson and Aaker (1985) suggest,
ROI and market share both result from the
influence of some common factors such as luck
and management quality, higher market share
allows the benefits of luck and management
quality to be retained for a longer period of time.
While not a direct effect of market share on
ROI, this is an important effect that gives an
additional incentive for implementing a market
share strategy.
Consistent with earlier studies making use of
the PIMS data base, e.g. Schoeffler, Buzzell and
Heany (1974), vertical integration has a significant
direct effect on ROI. A standard interpretation
of this correlation is that it reflects the increased
efficiency achieved by vertically integrated firms.
While the negative coefficient (-0.023) for low
vertical integration is insignificant, the results as
a whole suggest that vertical integration induces
stability. Firms in the upper quintile of vertical
integration have a lagged ROI coefficient 0.060
larger than a firm in the middle level of vertical
integration; but while vertical integration gives
the firm added control over its environment, and
so more stable returns, it may subject the firm
to greater volatility associated with economy-
wide and market fluctuations. This might explain
why the effects of vertical integration on the
persistence of return may be asymmetric, i.e. no
apparent influence of low integration but a positive
effect for a high level of integration. Rather
extreme integration may be needed to produce
additional stability in profits:
Also consistent with other PIMS studies,
(e.g. Gale, Heany and Swire, 1977), marketing
expenditure intensity is negatively related to
ROI. A number of hypotheses potentially explain
this finding. First, firms may over-advertise and
so adversely effect profits, (Aaker and Carman,
1982). Alternatively, firms in more competitive
markets may require higher marketing expendi-
tures. This requirement results in a negative
correlation between return and marketing expend-
itures through a joint association with compe-
tition.
The association of marketing intensity with
more persistent returns supports the notion that
marketing expenditures cope with competitive
forces. Firms with less intensive marketing
expenditures have less persistent returns, and
those with more intensive marketing expenditures

have more persistent returns. This implies that
marketing expenditures, on the average, dampen
competitive forces. That is, the market power
effect dominates the information effect. The
negative association between marketing intensity
and ROI may be an outgrowth of firms accepting
lower returns for greater stability.
Neither entry nor exit has a significant direct
impact on ROI. In fact, the coefficient estimates
for entry and exit, 0.591 and -0.371, respectively,
are of the wrong sign. Theoretically, entry should
cause profits to decrease and exit should cause
profits to increase. A simultaneity problem may
mask the empirical detection of this effect. In
addition to the influence of entry and exit on
profits, profits can be expected to influence entry
and exit. Higher profits in an industry should
induce entry, and lower profits should induce
exit. Simultaneity between ROI and entry/exit is
impossible for the data used in the analysis. The
entqdexit variables reported in the PIMS data base
occur prior to the ROI observation. However,
the results could be clouded by the fact that
profit expectations, which may be correlated with
current ROI, influence entry and exit decisions.
Entry also has an insignificant effect on the
persistence of returns. This suggests that new
entry is not required for competition. Existing
firms may expand output and/or copy the
strategies of a successful firm in the market to
bring return back to its competitive level.
However, exit has a significant negative impact
on persistence. The decision to cut back on
output may be quite difficult for management to
undertake. Exit may thus be a useful mechanism
to facilitate the convergence of return back up
to its long-term rate.
COPING WITH COMPETITIVE FORCES
The ability to find or create a position in a
market that a firm can defend against competitive
forces is at the core of strategy development.
Management will be unable to fully exploit its
comparative advantages/fortunate circumstances,
and so achieve a high level of return, if it cannot
achieve this. The results presented in Table 2
indicate three primary factors management can
influence, vertical integration, market share, and
marketing intensity, that insulate a firm from the
Persistence of Abnormal Returns 427
forces driving return back to its competitive level.
High vertical integration has a multi-faceted
impact on slowing competitive forces. Not having
to cope with independent firms at certain levels
of the channel diminishes a major competitive
force. Vertical integration eliminates opportun-
ities for the price increases (decreases) on the
part of suppliers (buyers), as well as actions such
as quality reductions, etc., that force return
down. Perhaps of equal, or greater, importance,
high vertical integration serves as a credible
threat to existing channel members. It indicates
that the firm is willing and able to integrate
both upstream and downstream. This threat of
potential entry into the supplier’s/buyer’s industry
helps to dissipate the market power of these
channel members. In addition, by securing both
upstream and downstream resources, it makes it
more difficult for existing firms to expand and
for new entry to occur. Thus, a vertically
integrated firm has diminished a number of the
major forces that help drive return back to its
competitive level.
These findings are quite consistent with recent
efforts to consolidate soft drink bottling networks.
PepsiCo bought ME1 Corporation, its third-
largest independent bottler, to give it control
over bottlers accounting for about a third of
domestic sales. Coca Cola has followed a similar
strategy. Coca Cola’s purchase of bottling oper-
ations from Beatrice and JTL Corporation has
given it control ov.er bottlers accounting for
approximately a third of its domestic sales. While
the issue of industry concentration appears most
important, the Federal Trade Commission took
vertical integration into account before voting to
block the proposed acquisitions of Dr. Pepper by
Coke, and Seven-Up by Pepsi.
Intense marketing expenditures, which allow
a firm to differentiate its product from the
competition, also show the convergence of
abnormal returns. The lack of substitutes in the
eyes of the customer makes it less likely for price
competition to drive return down. It also makes
it more difficult for entry to occur. Competitors
must spend heavily to overcome the loyalty and
image created by years of intense marketing
expenditures. In fact the expense of trying to
overcome this advantage may be too great. Given
the substantial advertising investment required
to establish a brand, i.e. estimates range up to
428 R . Jacobsen
$100 million annually for some products, buying
already established strategic positions may be
more effective and efficient than trying to develop
them. This fact can explain the recent acquisitions
of consumer goods companies, e.g. General
Foods, Richardson-Vicks, Nabisco, Stokely-Van
Camp, that established brands through decades
of intense advertising.
A study by Booz, Allen & Hamilton found
that of the 24 leading consumer brands in 1923,
19 are still leaders today. The study indicates
that a brand leader, if it is run correctly, can be
considered an annuity, since brand leadership is
sustainable. While perhaps the notion of an
annuity is too strong, as even high market share
firms’ abnormal profits appear to decay, the
results do indicate that market share does give
rise to longer-term profits. Higher market share
firms may have advantages of economies of scale/
scope and bargaining power that allow them to
better cope/deter competitive forces. Potential
entrants may be discouraged from entering an
industry with an established high market share
competitor. Buyers and suppliers may be reluctant
to attempt to exercise market power with a firm
that may account for a large percentage of the
industry, as well as perhaps their own, sales.
Clearly, these advantages can slow the conver-
gence process of abnormal returns.
CONCLUSION
Examining the time-series behavior of return
indicates that ROI can be characterized as
following a first-order autoregressive process. The
estimated autoregressive coefficient significantly
less than 1.00 indicates that profits converge.
Abnormal returns can to some extent (possibly
entirely) be characterized as a disequilibrium
phenomenon. However, management can under-
take strategies and go into markets that influence
the convergence process.
Management may wish to implement strategies
that increase flexibility and reduce the risk of
persistently low returns. This can be achieved by
not investing intensely in one area. This involves
being vertically disintegrated, having a low market
share (perhaps as part of niching strategy), not
spending heavily on marketing expenditures, and
being able to easily exit from a market.
The factor that has received the most attention
as an influence on the persistence of returns,
industry concentration, seems to play no role at
all. Concentration has extremely small and
insignificant influences on profitability and its
persistence. As theorized by Demsetz (1973), the
observed findings in past studies of a direct effect
of concentration of ROI seem to result from a
failure to control for other factors correlated with
both concentration and ROI, e.g. market share
and lagged ROI (acting as a proxy for luck/
management quality). Multivariate analysis indi-
cates that concentration neither increases return
nor slows it convergence. Competition may be
just as intense among a few large competitors as
between many small competitors. The failure to
detect an influence on ROI of market entry may
be an outgrowth of the same phenomenon of
competition among firms presently in the market
inducing competitive returns.
High vertical integration, market share, and
marketing expenditure intensity slow the conver-
gence process of return. While the difference of
coefficient estimates between the middle quintiles
and the upper quintile-approximately 0.05 for
each condition-may initially seem neglible, its
imprtance becomes more evident in the dissi-
pation of return over time. The slower decay of
abnormal returns results in a higher return in
each period for a number of years. Strategies
that increase vertical integration, market share,
and marketing expenditure intensity are impor-
tant not just because of their direct impact on
profitability, but also because of their influence on
its persistence. In fact, the effects of implementing
strategies that slow dissipation of above-average
profits may outweigh their direct effects on
profitability. However, the relatively small size
of coefficients indicating differences in the persist-
ence of return is evidence of how difficult it is
to insulate a firm from competitive forces.
Despite the best efforts of management,
in time, competitive forces dissipate abnormal
returns. Conditions under which abnormal rates
of return do not dissipate seem pathological, if
present at all. The existence of abnormal returns
is consistent with the outcome of a disequilibrium
phenomenon. Nonetheless, as perhaps illustrated
by the correlation between unanticipated ROI
and stock return, the understanding/management
of the dynamic time series process of ROI as it

returns to equilibrium may be one of the most
important concerns for strategy and public policy.
ACKNOWLEDGEMENTS
I thank Gary Hansen and Douglas MacLachlan
for their valuable comments, and the Strategic
Planning Institute for providing access to some
of the data used in this study.
REFERENCES
Aaker, David A. and James M. Carman. ‘Are you
overadvertising?’ Journal of Advertising Research,
22, August/September 1982, pp. 57-70.
Aaker, David A. and Briance Mascarenhas. ‘The need
for strategic flexibility’, Journal of Business Strategy,
5, Fall 1984, pp. 74-82.
Bain, Joe S. ‘Relation of profit rate to industry
concentration: American manufacturing, 193&40’,
Quarterly Journal of Economics, 65, August 1951,
pp. 293-324.
Ball, Ray and Phillip Brown. ‘An empirical evaluation
of accounting income numbers’, Journal of Account-
ing Research, 6, Autumn 1968, pp. 159-178.
Beaver, William H. ‘The time series behavior of
earnings’, Empirical Research in Accounting: Selec-
ted Studies. Supplement to Journal of Accounting
Research, 8, 1970, pp. 62-89.
Beaver, William H. and James Manegold. ‘The
association between market determined and
accounting determined measures of systematic risk:
some further evidence’, Journal of Financial and
Quantitative Analysis, 10, June 1975, pp. 231-284.
Bettis, Richard A. ‘Risk considerations in modeling
corporate strategy’, Academy of Management Pro-
ceedings, 1982, pp. 654-682.
Box, G . E. P. and G. M. Jenkins. Time Series
Analysis, Forecasting, and Control, Holden-Day,
San Francisco, CA 1976.
Branch, Ben. ‘The laws of the marketplace and ROI
dynamics’, Financial Management, 9, Summer 1980,
pp. 5&65.
Brozen. Yale. ‘The antitrust task force deconcentration
recommendation’, Journal of Law and Economics,
13, October 1970, p. 279-292.
Brozen, Yale. ‘Deconcentration reconsidered: Corn-
ment’, Journal of Law and Economics, 14, October
1971, pp. 489-491.
Buzzell, Robert D., Bradley T. Gale, and Ralph G.
M. Sultan. ‘Market share-a key to profitability’,
Havard Business Review, January-February 1975,
pp. 97-106.
Christie, Andrew. ‘On cross-sectional analysis in
accounting research’, Working paper, University of
Southern California, November 1984.
Demsetz, Harold, ‘Industry structure, market rivalry,
Persistence of Abnormal Returns 429
and public policy,’ Journal of Law and Economics,
16, April 1973, pp. 1-10,
Devinney, Timothy M., David W. Stewart and Allan
D. Shocker. ‘A note on product portfolio ‘theory’
A Rejoinder to Cardozo and Smith’, Journal of
Marketing, 49, Fall 1985, pp. 107-112.
Dickey, David A. and Wayne A. Fuller. ‘Distribution
of the estimators for autoregressive time series with
a unit root’, Journal of the American Statistical
Association, 74, June 1979, pp. 427431.
Evans, G.B.A. and N.E. Savin. ‘Testing for unit
roots’, Econometrica, 49, May 1981, pp. 753-779.
Farris, Paul W. and Mark S. Albion. ‘The impact of
advertising on the price of consumer products’,
Journal of Marketing, 44, Summer 1980, pp. 17-35.
Fisher, Franklin M. and John J. McGowan. ‘On the
misuse of accounting rates of return to infer
monopoly profits’, American Economic Review, 73,
March 1983, pp. 82-97.
Gale, Bradley T. and Ben S. Branch. ‘Concentration
versus market share: which determines performance
and why does it matter?’ Antitrust Bulletin, 27,
Spring 1982, p. 83-105.
Gale, Bradley T., Donald Heany and Donald Swire.
The Par ROI Report: Explanation and Commentary
on Report, Strategic Planning Institute, Cambridge,
MA, 1977.
Jacobson, Robert. ‘The validity of ROI as a measure
of business performance’, American Economic
Review, 77, June 1987, pp. 47C478.
Jacobson, Robert and David A. Aaker. ‘Is market
share all that it’s cracked up to be?’, Journal of
Marketing, 49, Fall 1985, pp. 11-22.
Mancke, Richard. ‘Causes of interfirm profitability
differences: a new interpretation of the evidence’,
Quarterly Journal of Economics, 88, May 1974, pp.
181-193.
Mills, David E. and Laurence Schumann. ‘Industry
structure with fluctuating demand’, American Eco-
nomic Review, 75, September 1985, pp. 758-767.
Mueller, Dennis C. ‘The persistence of profits above
the norm’, Economica, 44, November 1977. pp.
369-380.
Qualls, David. ‘Stability and persistence of economic
profit margins in highly concentrated industries’,
Southern Economic Journal, 40, April 1974, pp.
604-6 12.
Ravenscraft, David J. ‘Structure-profit relationship at
the line of business and industry level’, Review of
Economics and Statistics, 65, February 1983, pp.
22-3 1.
Roll, Richard. ‘A critique of the asset pricing theory’s
tests’, Journal of Financial Economics, 4, March
1977, pp. 129-176.
Scherer, F. M. Industrial Market Structure and Eco-
nomic Performance, 2nd edn, Houghton Mifflin,
Boston, MA, 1980.
Schoeffler, Sidney, Robert D. Buzzell and Donald F.
Heany. ‘Impact of strategic planning on profit
performance’, Havard Business Review, 52,
March-April 1974, pp. 137-145.
430 R. Jacobsen

Stigler, George J. Capital and Rates of Return Sons, New York, 1971.
in Manufacturing Industries, Princeton University Wenders, John T. ‘Deconcentration reconsidered’,
Press, Princeton, IL, 1963. Journal of Law and Economics, 14, October 1971,
Theil, Henri. Principles of Economics, John Wiley & pp. 485-488.