Advances in Management and Applied Economics

Earnings Persistence in the IT Sector

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• Abstract

  I analyze the stochastic properties of three measures of profitability for the Information Technology Economic Sector using a balanced panel of disaggregated US Information Technology (IT) firms during the period 1995-2009. I use three measures of profitability, return on assets (ROA), return on equity (ROE), and return on investment (ROI), employing a panel unit-root approach, which assists in identifying competitive outcomes versus non-competitive conditions stemming from new innovation and discriminant pricing practices prevalent in many segments of the IT sector. I disaggregate the sector into five segments and examine the data for cross-sectional dependence. After controlling for cross-sectional dependence, I apply Pesaran (2007) unit root (CIPS test) and find that profitability persists across segments. Our findings do not produce compelling evidence in support of the long-standing “competitive environment” hypothesis originally set forward by Mueller (1977).