Insights #19: Corporate Vampires: The persistence of economic loss-making firms

Firms aren’t supposed to be immortal—competition is supposed to weed out the unviable. However, counterintuitively, some firms persist in generating sustained negative economic profits (EP). Taking a cohort of firms that consistently generate EP losses from 2010 to 2014, we find that 8 years later, 18% of these firms continue to destroy value. At the sector level, utilities and communication services have the highest prevalence of such corporate vampires, while the IT sector displays the lowest persistence. State support could be playing an important role in enabling the survival of ‘vampire’ firms.

20 Feb 2024 · Sára Czégé, Camilla Erencin, Simon J. Evenett, Pierre Ledan, Adam Novak and Felix Reitz

Insights #18: Do the Mighty Falter? How often do firms that earn supra-normal profits revert back to the competitive norm?

It is a fundamental law of economics that firms in a competitive market should make zero economic profit (EP) in the long-run. In reality, though, many companies generate excess positive or negative EP. However, we also document a high degree of EP mobility. Every year an average of 3.3% of listed firms transition from a state in which they earn more than 50 mn USD or less than minus 50 mn USD back to the competitive. About 4% of companies go the other way. EP mobility is particularly high in the utilities and energy sectors and in countries with many firms in these industries, such as Brazil and Russia. About 14% of firms, however, stay in a ‘non-competitive’ EP state for at least three years.

14 Feb 2024 · Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz

Insights #17: The “Crux of Corporate Taxation”: Do more profitable firms pay more corporate taxes? What do negative cash effective tax rates reveal?

Concerns about corporate tax avoidance have become salient. Crux of Capitalism data reveals a clear positive relationship between a company's economic profitability and its net tax payments. While the percentage of firms with negative cash effective tax rates exhibit cyclical variation, there is an overarching upward trend. In the United States, the share of firms with negative cash ETR rose by 14 percentage points from 2005 to 2022. In China, 13% of listed firms received net tax refunds in 2022.

8 Feb 2024 · Sára Czégé, Camilla Erencin, Simon J. Evenett, Adam Novak and Felix Reitz

Insights #16: Are fears of rising corporate distress warranted? A sectoral perspective

A review of contemporary measures of bankruptcy risks in 21 economies shows they vary markedly across sectors. In Q2 2023, for example, 23% of healthcare firms showed a negative Altman Z’’-Score, a commonly used metric of bankruptcy risk. Meanwhile, this was the case for only 5% of utility companies. With the notable exception of the healthcare sector, surprisingly, these percentages have barely risen in recent years. But this may still be the calm before the storm. As higher market interest rates inflate corporate interest expenses, more firms could turn into ‘zombies’ and then witness rising risks of bankruptcy (Altman Z’’-Scores below zero). Monitoring such transitions is necessary going forward.

3 Feb 2024 · Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz

Insights #15: Renewable Energy: Not Economically Sustainable

The energy transition requires huge investment into green infrastructure to meet UN climate goals; however, when profits are properly calculated, renewable energies are currently not economically viable. Despite lower capital costs compared to oil and gas firms—2.4% less on average—renewable energy firms struggle to create economic profits. This is primarily due to the large amounts of invested capital required for renewable energy firms to build out their infrastructure. Escaping the gravity of corporate value destruction indeed requires the renewable energy sector to expand and secure benefits from scale or reinvent their business strategies.

31 Jan 2024 · Sára Czégé, Camilla Erencin, Simon J. Evenett, Pierre Ledan, Adam Novak and Felix Reitz

FDI Intelligence: How to attract FDI in an era of high interest rates

Will more costly capital affect how governments compete for the declining pools of corporate FDI? Using Crux of Capitalism data on the weighted average cost of capital, we demonstrate that by the second quarter of 2022, the median WACC was rising in all four major economies: China, Germany, Japan, and the US. Greater costs of capital will raise hurdle rates for FDI. Fortunately, there are plenty of public policy tools beyond fiscal inducements that affect companies’ desire to invest via FDI. We conclude that a byproduct of the normalisation of monetary policy and fiscal space constraints is that greater differentiation in how states chase FDI can be expected.

22 Jan 2024 · Simon J. Evenett, Camilla Erencin, Felix Reitz

Insights #14: Winner-takes-all dynamics are not confined to tech firms or to the United States: Evidence on profit concentration from 21 economies

The notion that commercially unassailable superstar firms generate excess profits has taken hold in the United States. Evidence of the concentration of economic—as opposed to accounting—profits of publicly-listed companies in 21 economies from 2018 to 2022 is marshalled here. This allows for US experience to be benchmarked against other economies. Economic profit concentration is found to be more severe in many other nations. Cross-sectoral comparisons reveal that the IT sector does not have the most concentrated economic profits.

11 Jan 2024 · Sára Czégé, Camilla Erencin, Simon J. Evenett, Pierre Ledan, Adam Novak and Felix Reitz

Insights #13: Corporate R&D spending and the flaws of accounting profits: A tale of American exceptionalism, the Chinese dragon, and Japanese stagnation

R&D is an important engine of economic value creation. We find that North American firms accounted for 47% of the world’s corporate R&D spending in 2022, 2.5 times more than their Chinese and European counterparts. Chinese companies, however, now spend 8,000% more on R&D than they did in 2005, while American (+174%), European (+64%), and Japanese (+28%) firms show less growth. The IT, healthcare, and consumer discretionary sectors are the largest R&D spenders. The resilience of R&D spend during 2020 and 2021 varies markedly across sectors and geography.

29 Dec 2023 · Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz

Insights #12: The end of an era? Corporate capital costs are ratcheting up. How is this playing out across countries and sectors over time?

As central bankers have lifted interest rates to restore their inflation-fighting credentials, the capital costs of firms have risen as well. We find that funding costs are currently much higher for Western firms than for their Chinese and Japanese counterparts. Firms in the energy and IT sectors face particularly changing circumstances. The increase in capital costs between Q2 2022 and Q2 2023 were largest in Russia and South Africa. Capital costs for Italian industrial and energy firms spiked, too.

28 Dec 2023 · Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz

Insights #11: The sooner the better: How quickly can we learn about the economic profitability of publicly-listed companies?

High quality data that is available fast and for a broad set of countries is hard to come by. Yet, it can be essential for improving economic forecasts and for assessing economic health at time of acute stress. This analysis shows that, for most countries in our sample, the data needed to meaningfully track economy-wide economic profit and corporate distress metrics is available just 45 days after a quarter ends. This is true for all European and North American economies plus Indonesia, Brazil, Singapore, and India. For the United States and Sweden enough data is available after just 30 days.

18 Dec 2023 · Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz

Insights #10: The ‘Magnificent Seven’ (M7): Assessing their contribution to the performance of US publicly listed firms

By now, the 'Magnificent Seven' “tech” stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – together amount to around 30% of the S&P 500's market cap. Crux of Capitalism data reveals their heft extends beyond that. In 2022, these 7 giants alone accounted for 32% of the economic profit of all firms listed in the US stock market. Plus, with the M7 responsible for 38% of total R&D spending, these companies are central to US innovation ecosystems.

4 Dec 2023 · Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett, Pierre Ledan, Adam Novak and Felix Reitz

Insights #9: Can our Economic Profit, ICR, and Z’’-Score variables improve key macroeconomic forecasts for Switzerland? A tentative application

In his recent remarks at the ECB Forum Alfred Kammer from the IMF admitted that “forecasting is a humbling process” and that more granular bottom-up data may be needed. Our Crux of Capitalism database can contribute here. In the Swiss context, we show that our firm-level metrics on economic profits and corporate distress may be valuable leading indicators for macroeconomic variables, which can improve key economic forecasts. The mean absolute predication error (out-of-sample) in our preferred forecast model for real Swiss GDP growth, for example, drops by 45%.

30 Nov 2023 · Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber, Adam Novak and Felix Reitz

Insights #8: Relapse. Is the German economy the Sick Man of Europe once again?

After nearly two decades, claims that Germany is the “sick man of Europe” are making a comeback. Germany is the only major advanced economy expected to see its GDP shrink, the IMF contend. Our firm-based performance data reveals a 50% drop in economic profit for Germany’s publicly-listed firms in the first-half of 2023. The resulting crimp on investments by corporate giants like BASF and Siemens ought to be a major economic policy concern. While other EU countries are also experiencing economic profit declines in 2023, falls in Germany are more pronounced — heightening the imperative of reform.

27 Sep 2023 · Magaly Abboud, Sára Czégé, Camilla Erencin, Simon J. Evenett and Felix Reitz

Beware of false profits: how a firm’s true added value can benefit society

Measuring economic profits rather than accounting profits is a far more reliable indicator of a company’s performance, argue Simon Evenett and Felix Reitz. And value-creating firms are well-equipped to help fund sustainability as well as making healthy returns for shareholders.

10 Nov 2023 · Simon J. Evenett and Felix Reitz

Insights #7: How much economic profit do Chinese firms generate? Is corporate China catching up with the United States powerhouse?

We examine whether China’s tremendous economic growth this century has a counterpart in significant economic profitmaking by its firms. We find that Chinese companies only started to generate significant economic profits after 2019. The largest firms in the consumer discretionary, IT, and industrial sectors have driven this recent upturn. Yet, these developments appear vulnerable. Furthermore, even with the recent increases, Chinese firms only create 34% of the economic profits of their US counterparts.

14 Sep 2023 · Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz

Insights #6: Close to the Edge? How many firms around the world are in or close to corporate distress? And how do our results differ from others?

As interest rates rose in many economies, fears of a “hard landing” grew. But has tighter monetary policy translated into more firms going into corporate distress? The Crux of Capitalism project tracks three indicators of corporate performance and is well placed to assess how many firms are close to the edge. In 2021 and 2022 already 25% of firms struggled to make their interest payments, 8% showed elevated risk of bankruptcy, and 28% were destroying economic value. Australian and Canadian firms appear to be especially vulnerable, while fewer Japanese and Swiss counterparts are in danger.

14 Sep 2023 · Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz

Insights #5: Why assessing corporate distress using our Interest Coverage Ratio and the Altman Z’’-score is revealing

A firm is in distress if its current operations cannot generate the means to meet its interest payments and/or bankruptcy risk is too high. The Crux of Capitalism project generates interest coverage ratios and Altman’s Z’’-scores that, when combined, indicate whether a firm is likely to be in corporate distress. Sorting between viable zombie companies and more destined for failure is possible. This approach could support the development of accurate early warning indicators and, during an era of interest rate normalisation, reduce false alarms about unviable zombie firms.

14 Sep 2023 · Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz

Insights #4: Outcomes matter: Do aggregate economic profit outcomes align with established metrics about national business environments?

The economic profit measure developed in the Crux of Capitalism initiative is based solely on reported firm performance. As such it departs from established metrics of the national business environment, parts of which are based on perceptions of national policies and institutional effectiveness. Here we compare across countries and over time to assess where our outcome measure confirms or departures from high-profile, established metrics of the national business environment.

14 Sep 2023 · Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz

Insights #3: Which economies create the most value? Economic profits and the importance of taking non-listed firms into account

Fair cross-country comparisons of the value created by capitalist economies require accounting for differences in the propensity of firms to list on stockmarkets. We compute the shares of companies listed by country, year, and asset size category and find significant cross-country variation. Adjusting for these differences changes rankings of nations based on total economic profit generated in plausible ways. Adding the contribution of non-listed firms raised the total economic profit generated in the 21 economies studied in the Crux of Capitalism project by 35% on average for the 2014-2022 period. This correction does not alter the US primacy in global economic value creation.

14 Sep 2023 · Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz

Insights #2: How much money can our largest corporations spend fixing the world?

Our societies confront a number of critical challenges such as the transitions to a low-carbon economy and to a digital and aging society. Many expect a lot from business, begging the question of how much economic profits are available for any use, including investing in the future of the business. We find that in 2022 publicly-listed firms in 21 capitalist economies generated significant surpluses. Based on our economic profit measures, these companies have at most 2.8 trillion USD to deploy, with notable concentrations in the IT, health care, consumer discretionary, and industrial sectors.

14 Sep 2023 · Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz

Insights #1: Why assessing capitalism through an economic profit lens makes sense

The Crux of Capitalism project calls into question the efficacy of accounting profit measures when assessing a firm’s ability to create value through its current operations. An economic profits measure is advanced instead and is executed at the firm level and then aggregated across firms into sectoral and national totals. Three examples where accounting profits measures obscure the underlying health of firms and capitalist economies are provided here.

14 Sep 2023 · Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett, Alexander Gruber and Felix Reitz

How fares the commanding heights of the Swiss economy? Evidence from the Crux of Capitalism project

The track record of Swiss publicly-listed companies in creating economic value is assessed, along with their propensity to experience corporate distress. This assessment is conducted both in absolute terms and relative to foreign peers for the years 2005 to 2022. Established measures of corporate distress were augmented by a specially-constructed economic profits measure assembled from quarterly financial reports. While on average Swiss firms perform better in economic profit terms than rivals from neighbouring countries, there are doubts as to whether Swiss firms can generate higher levels of economic profit in the future, especially as the cost of capital is rising.

14 Sep 2023 · Magaly Abboud, Fabio Bernasconi, Sára Czégé, Camilla Erencin, Simon J. Evenett , and Felix Reitz
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