Determinants of profitability in European manufacturing and services: evidence from a dynamic panel model

Recent advances in panel data econometrics are used to investigate the determinants of profitability for manufacturing and service sector firms in Belgium, France, Italy and the UK, for the period 1993-2001. The paper synthesizes empirical models that have been used by researchers in industrial economics, strategic management and accounting and finance. Despite the formation of the European Union's Single Market in goods and services, abnormal profit still appears to persist significantly from year to year. There is evidence of a negative size-profitability relationship, but the relationship between market share and profitability is positive, and stronger in manufacturing than in services. The relationship between a firm's gearing ratio and its profitability is negative, but firms with higher liquidity tend to be more profitable.