Risk and Corporate Rate of Return
Jan 1, 1967
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The analysis in P-3725 of the relationship between corporate profits and risks during the period 1950-1964 is extended to include impacts of (1) size of firm, (2) growth in sales, (3) size of industry, (4) industry concentration, and (5) stock price/earnings ratio. The intention is to distinguish not only risk premiums but other functional and nonfunctional components of profit, such as monopoly rents. The result is to narrow the differentials among industry rates of return. Drugs and aerospace, the industries with the highest profit rates in the previous analysis, did not show much decline in adjusted rates of return. The major conclusion is that the distinction between corporate risks arising from factors beyond the control of the firm and those within the control of the firm is a useful concept, but that it should be embodied in a broad analytical framework such as that sketched in this paper.
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