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Abstract: We 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. We 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. We disaggregate the sector into five segments and examine the data for cross-sectional dependence. After controlling for cross-sectional dependence, we 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).
Key words: Cross-sectional dependence, unit roots, panel data, firm profitability
JEL codes: C23, D22, L25