Working Paper: NBER ID: w10150
Authors: Robert E. Hall
Abstract: Earnings are the flow of value created by corporations. I concentrate on the concept called EBITDA earnings before interest, taxes, depreciation, and amortization. This measure captures the results of the substantive non-financial activities of corporations and corresponds to the rental price of capital multiplied by the quantity of capital. I measure earnings per dollar of capital for all U.S. corporations and in 5 selected industries. I develop a competitive benchmark for the level of earnings, which takes account of adjustment costs, taxes, depreciation, and the financial opportunity cost of funds. I find that aggregate corporate earnings track the benchmark reasonably closely, leaving a relatively small unexplained component. Thus evidence of the flow of value gives little help in explaining the large discrepancies found in earlier work in the level of the market value of claims on corporations relative to the replacement cost of the capital stock. At the industry level, I find more volatility of both actual and benchmark earnings, with a high correlation between the two in 3 of the 5 industries.
Keywords: Corporate Earnings; EBITDA; Competitive Benchmark; Market Value
JEL Codes: E22; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competitive benchmark (L13) | Corporate earnings (G35) |
| Industry characteristics (L81) | Earnings volatility (G17) |
| Actual earnings (J31) | Benchmark earnings (C51) |
| Discrepancies between actual and benchmark earnings (J31) | Rents associated with scarce capital (D33) |