– How will large companies survive in the long run? Researchers from Bamberg studied 500 American corporations. Surprisingly, individual characteristics are not decisive.
Two researchers from Bamberg together with colleagues from the Spanish city of Castellón de la Plana want to find out what will ensure the long-term survival of at least American corporations.
“Until now, researchers have only studied companies of all ages, starting with start-ups. They emphasized that the success of a company is determined by individual characteristics such as the size of the company or the potential for growth, ”explains study leader and professor Mishael Milaković in a press release from the University of Bamberg. “For the first time, we have purposefully placed the emphasis on long-lived companies. And surprisingly, in the long run it is not about individuality, but about two things in common, ”says the Department of Economics, in particular International Economics.
Two cross-industry indicators
According to the study, the surveyed companies have an average long-term return on assets of around nine percent. On the other hand, their long-term volatility in profitability is no more than 6 percent per year across all industries except banking.
What do these two parameters mean? Return on capital provides information on how efficiently a company uses its capital to make a profit, according to a statement by the University of Bamberg. A company that has EUR 100 million of capital at its disposal and thus generates EUR 9 million in profit annually, generates a 9% return on investment.
The second key measure is volatility, which is the fluctuation in a company’s return on investment. If it is no more than six percent per year in the long run, it seems sufficient with a sufficient return on investment of nine percent to survive in the US market in the long run.
Different numbers for Germany
‘In this study, we focused on the United States,’ says Professor Milakovic from Bamberg. Using statistical physics methods, the research team studied 500 of America’s longest-lived corporations, including Apple, Procter & Gamble, and Johnson & Johnson. All companies are at least 25 years old.
“In the meantime, we have also assessed the first figures from Germany, France and Japan, which are significantly lower than the US,” says Milaković. Why the mean values are lower in these three countries has not yet been investigated. In Germany, the return on capital and the range of its fluctuations for long-lived corporations such as VW, Siemens and Bayer are about a third lower than in the USA, and in Japan even below half of the American value.
Long-lived German or Japanese corporations can therefore afford to generate a lower return on investment in the long run, but their profitability may fluctuate less than US corporations.
Milaković’s Cathedral is currently examining whether the acquired knowledge relates to the past. “According to our preliminary assessments, our results can be applied to very long periods – both in the US and in Germany,” says Prof. “Return on capital and its fluctuations remain very stable for long-lived corporations even in times of global crisis, such as the ‘Long Depression’ of the 1870s or the global financial crisis of 2007-2009.”
It was not until the “Great Depression” of the 1930s that there were clear negative deviations in the return on capital of large corporations, which otherwise remained remarkably stable historically. Scientists expect to publish further results in 2023.
Information: The study entitled “Survival and the Ergodicity of Corporate Profitability” (Mishael Milaković, Philipp Mundt, Simone Alfarano) was published in May 2022 in the journal “Management Science”.