Abstract
SYNOPSIS: We empirically examine the profitability of leading Chinese firms, benchmarked against comparable U.S. firms, for the period 2005-2013. Return on invested capital (ROIC), which excludes leverage effects on performance, provides the primary metric. Averaged over firms and years, the two sets of firms have similar profitability, about 11 percent annually. Decomposing ROIC into free cash flow yield and invested capital growth, we show that the same ROIC has very different compositions: while the Chinese firms have high growth and negative free cash flows, the U.S. firms have low growth and positive free cash flows. Due to balance sheet conservatism, we infer that Chinese (U.S.) firms’ free cash flow yields and the resulting ROICs have been biased downward (upward). After correcting for the bias, we show that Chinese firms have much higher profitability than their U.S. counterparts: 15.1 percent versus 8.1 percent. This result is driven by the abundance of growth opportunities in China in our sample period. When we control for the growth rates, we find U.S. firms have been more “efficient” in generating more free cash flows than Chinese firms.
| Original language | English |
|---|---|
| Pages (from-to) | 799-828 |
| Journal | Accounting Horizons |
| Volume | 29 |
| Issue number | 4 |
| DOIs | |
| Publication status | Published - 1 Dec 2015 |
| Externally published | Yes |
Bibliographical note
Publication details (e.g. title, author(s), publication statuses and dates) are captured on an “AS IS” and “AS AVAILABLE” basis at the time of record harvesting from the data source. Suggestions for further amendments or supplementary information can be sent to [email protected].Research Keywords
- Accounting conservatism
- Chinese firms
- Growth
- Profitability
- ROIC