Do profit margins expand for high growth firms?
Journal
Journal of Management Accounting Research
Subject
Accounting
Publishing details
Authors / Editors
Ertan A;Lewellen S;Thomas J
Biographies
Publication Year
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
Available on ECCH
No