Concentration Ratios, Financial Leverage and Profitability: The Case of Selected Philippine Corporations, 1997-2006

Abstract

Studies on the empirical relationship between market share and profitability have focused largely on operating profitability, with little attention to the contribution of financial leverage or financing-related profitability. This paper aims to contribute to the literature on what traditionally has been the purview of the field of industrial organization but which needs to recognize the significance of corporate financial decisions in strategic policy formulation.

There is no evidence to support the hypothesis that profitability as measured by return on equity is positively and linearly related to concentration indices as measured by relative market share. There seems to be a modicum of evidence, however, that points to the relationship between financial leverage and market share albeit only at the high-end of concentration ratios. At this end of the spectrum, corporations conceivably take advantage of corporate size in leveraging their resources for greater profitability.

The use of multi-year averages of profitability and of market share to reduce the “noise” of year-to-year variations did little to address the chaotic behavior of single-year estimates. The procedure failed to smoothen out the variability that was hoped would allow the extraction of empirical evidence to support longstanding theories.