Franklin M. Fisher

Abstract: Accounting rates of return are frequently used as indices of monopoly power and market performance by economists and lawyers.' Such a procedure is valid only to the extent that profits are indeed monopoly profits, accounting profits are in fact economic profits, and the accounting rate of return equals the economic rate of return. The large volume of research investigating the profits-concentration relationship uniformly relies on accounting rates of return, such as the ratio of reported profits to total assets or to stockholders' equity as the measure of profitability to be related to concentration.2 Many users of accounting rates of return seem well aware that profits as reported by accountants may not be consistent from firm to firm or industry to industry and may not correspond to economists' definitions of profits. Likewise, they recognize that accountants' statements of assets, hence also stockholders' equity, may fail to correspond to economically acceptable definitions, because accounting practices do not provide for the capitalization of certain activities such as research and development and do not incorporate allowances for inflation. This is to say they are well aware of certain measurement problems which arise in using available accounting information to measure profitability. They seem, however, totally unaware of a much deeper conceptual problem, namely, that accounting rates of return, even if properly and consistently measured, provide almost no information about economic rates of return.3 The economic rate of return on an investment is, of course, that discount rate that equates the present value of its expected net revenue stream to its initial outlay. Putting aside the measurement problems referred to above, it is clear that it is the economic rate of return that is equalized within an industry in long-run industry competitive equilibrium and (after adjustment for risk) equalized everywhere in a competitive economy in long-run equilibrium. It is an economic rate of return (after risk adjustment) above the cost of capital that promotes expansion under competition and is produced by output restriction under monopoly. Thus, the economic rate of return is the only correct measure of the profit rate for purposes of economic analysis.4 Accounting rates of return are useful only insofar as they yield information as to economic rates of return.5 *Fisher is professor of economics, Massachusetts Institute of Technology. McGowan was Vice-President, Charles River Associates. He died on April 7, 1982. This paper is based on work done for Fisher's testimony as a witness for IBM in U.S. v. IBM (69 Civ. 200, U.S. District Court, Southern District of New York). We are indebted to Larry Brownstein, Steven Hendrick, and especially Karen Larson and Leah Hutten for computational and programming assistance. Any errors are our responsibility. 'Aside from U.S. v. IBM, see, for example, Joseph Cooper, p. 15; the various industry studies in Walter Adams; and the discussion in Philip Areeda and Donald Turner, Vol. II, pp. 331-41. 2See the comprehensive reviews of this literature by Leonard Weiss and more recently by F. M. Scherer, pp. 267-95. Additional accounting problems raised by attempting to measure profitability by line of business are discussed extensively in George Benston. 3A referee suggests that even the crudest accounting information tells us IBM is more profitable than American Motors (AMC), but we disagree. Surely accounting information tells us IBM generates more dollars of profits per dollar of assets than does AMC but, as the examples below demonstrate, that information alone does not tell us which firm is more profitable in the sense of having a higher economic rate of return. 4This is literally true only if the cost of capital is first subtracted. In what follows below, we follow the usual empirical practice of measuring all rates of return before such subtraction. sThe existence of a uniquely defined economic rate of return-which we now assume for the theoretical analysis below and which occurs in all the examples-is

Abstract: This paper surveys the theoretical literature on aggregation of production functions. The objective is to make neoclassical economists aware of the insurmountable aggregation problems and their implications. We refer to both the Cambridge capital controversies and the aggregation conditions. The most salient results are summarized, and the problems that economists should be aware of from incorrect aggregation are discussed. The most important conclusion is that the conditions under which a well-behaved aggregate production function can be derived from micro production functions are so stringent that it is difficult to believe that actual economies satisfy them. Therefore, aggregate production functions do not have a sound theoretical foundation. For practical purposes this means that while generating GDP, for example, as the sum of the components of aggregate demand (or through the production or income sides of the economy) is correct, thinking of GDP as GDP=F(K, L), where K and L are aggregates of capital and labor, respectively, and F(•) is a well-defined neoclassical function, is most likely incorrect. Likewise, thinking of aggregate investment as a well-defined addition to ‘capital’ in production is also a mistake. The paper evaluates the standard reasons given by economists for continuing to use aggregate production functions in theoretical and applied work, and concludes that none of them provides a valid argument.

Abstract: This paper discusses recent work on the existence of aggregate production functions in models in which capital goods are specific to firms and cannot be used interchangeably. It is found that this raises problems not only for capital aggregation but also for the existence of labor and output aggregates. Recent work on the question of using aggregate production functions as approximations is also discussed.

Abstract: The second edition of this acclaimed graduate text provides a unified treatment of two methods used in contemporary econometric research, cross section and data panel methods. By focusing on assumptions that can be given behavioral content, the book maintains an appropriate level of rigor while emphasizing intuitive thinking. The analysis covers both linear and nonlinear models, including models with dynamics and/or individual heterogeneity. In addition to general estimation frameworks (particular methods of moments and maximum likelihood), specific linear and nonlinear methods are covered in detail, including probit and logit models and their multivariate, Tobit models, models for count data, censored and missing data schemes, causal (or treatment) effects, and duration analysis. Econometric Analysis of Cross Section and Panel Data was the first graduate econometrics text to focus on microeconomic data structures, allowing assumptions to be separated into population and sampling assumptions. This second edition has been substantially updated and revised. Improvements include a broader class of models for missing data problems; more detailed treatment of cluster problems, an important topic for empirical researchers; expanded discussion of "generalized instrumental variables" (GIV) estimation; new coverage (based on the author's own recent research) of inverse probability weighting; a more complete framework for estimating treatment effects with panel data, and a firmly established link between econometric approaches to nonlinear panel data and the "generalized estimating equation" literature popular in statistics and other fields. New attention is given to explaining when particular econometric methods can be applied; the goal is not only to tell readers what does work, but why certain "obvious" procedures do not. The numerous included exercises, both theoretical and computer-based, allow the reader to extend methods covered in the text and discover new insights.

Abstract: This paper examines the relation between the monitoring of CEOs by inside and outside directors and CEO resignations. CEO resignations are predicted using stock returns and earnings changes as measures of prior performance. There is a stronger association between prior performance and the probability of a resignation for companies with outsider-dominated boards than for companies with insider-dominated boards. This result does not appear to be a function of ownership effects, size effects, or industry effects. Unexpected stock returns on days when resignations are announced are consistent with the view that directors increase firm value by removing bad management.

Abstract: The article outlines the production function approach to the estimation of the returns to R&D and then proceeds to discuss in turn two very difficult problems: the measurement of output in R&D intensive industries and the definition and measurement of the stock of R&D 'capital'. Multicollinearity and simultaneity are taken up in the next section and another section is devoted to estimation and inference problems arising more specifically in the R&D context. Several recent studies of returns to R&D are then surveyed, and the paper concludes with suggestions for ways of expanding the current data base in this field.

Abstract: The author systematically examines one of the important issues of information — establishing the market price. He introduces the concept of «search» — where a buyer wanting to get a better price, is forced to question sellers. The article deals with various aspects of finding the necessary information.