JOURNAL ARTICLE

Do Digital Technology Firms Earn Excess Profits? Alternative Perspectives.

  • Published In: Accounting Review, 2023, v. 98, n. 4. P. 321 1 of 3

  • Database: Business Source Ultimate 2 of 3

  • Authored By: Rajgopal, Shivaram; Srivastava, Anup; Zhao, Rong 3 of 3

Abstract

Despite regulators' allegations that digital technology giants misuse their market power to earn abnormal profits, there is a dearth of systematic work on (1) whether digital-tech firms in general, and tech giants in particular, earn excess profits or (2) whether their abnormal profitability, if any, is due to market power. We use two alternative measures of economic profitability in addition to accounting rate of return (ARR): internal rate of return (IRR), which equates current investments to their long-term payback, and return on invested capital (ROIC), whose numerator (profits) and denominator (invested capital) are adjusted for capitalized intangibles. Inferences based on IRRs differ from those based on ARRs and ROICs. IRRs show that the digital-tech sector is now the best-performing sector, and its gap between profitability and cost of capital has increased over time. We are unable to separate the contribution of market power and innovation to digital tech's high IRRs. JEL Classifications: D43; L1; M21; M41. [ABSTRACT FROM AUTHOR]

Additional Information

  • Source:Accounting Review. 2023/07, Vol. 98, Issue 4, p321
  • Document Type:Article
  • Subject Area:Military History and Science
  • Publication Date:2023
  • ISSN:0001-4826
  • DOI:10.2308/TAR-2021-0176
  • Accession Number:165115363
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