Case Assignments - Case # 1 Profitability Effects of Firm...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Case # 1 Profitability Effects of Firm Size for DJIA Companies Does large firm size, pure and simple, give rise to economic profits? This question has long been a source of great interest in both business and government, and the basis for lively debate over the years. Economic theory states that large relative firm size within a given economic market gives rise to the potential for above-normal profits. However, economic theory makes no prediction at all about a link between large firm size, pure and simple, and the potential for above-normal profits. By itself, it is not clear what economic advantages are gained from large firm size. Pecuniary or money-related economies of large size in the purchase of labor, raw materials, or other inputs are sometimes suggested. For example, some argue that large firms enjoy a comparative advantage in the acquisition of investment funds given their ready access to organized capital markets, like the New York Stock Exchange. Others contend that capital markets are themselves very efficient in the allocation of scarce capital resources and that all firms, both large and small, must offer investors a competitive rate of return in order to grow and prosper. Still, without a doubt, the profitability effect of large firm size is a matter of significant business and public policy interest. Ranking among the largest corporations in the United States is a matter of significant corporate pride for employees, top executives and stockholders. Sales and profit levels achieved by such firms are widely reported and commented upon in the business and popular press. At times, congressional leaders have called for legislation that would bar mergers among giant companies on the premise that such combinations create monolithic giants that impair competitive forces. Movements up and down lists of the largest corporations are chronicled, studied, and commented upon. It is perhaps a little-known fact that, given the dynamic nature of change in the overall economy, few companies are able to maintain, let alone enhance, their relative position among the largest corporations over a 5- to 10-year period. With an annual attrition rate of 6 percent to 10 percent among the 500 largest corporations, it indeed appears to be “slippery” at the top. To evaluate the link, if any, between profitability and firm size, it is interesting to consider the data contained in Table 1.1 on the corporate giants found within the Dow Jones Industrial Average (DJIA). These are profit and size data on 30 of the largest and most successful corporations in the world. Companies included in the DJIA are selected by and reviewed by editors of The Wall Street Journal . For the sake of continuity, changes in the composition of the DJIA are rare. Changes occur twice in a decade, and only after corporate acquisitions or other dramatic shifts in a component corporation’s core business. When events necessitate a change in the DJIA, the entire index is reviewed and multiple component changes are often implemented simultaneously. There are no
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/19/2011 for the course EWR 1 taught by Professor Bazaz during the Spring '11 term at Arizona Western College.

Page1 / 16

Case Assignments - Case # 1 Profitability Effects of Firm...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online