Determinants of return-on-equity in USA, German and Japanese manufacturing firms

Stephanie M. Weidman · Daniel J. McFarland · Gülser Meriç · İlhan Meriç

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Financial Analysis and Corporate Governance Corporate Finance and Governance Working Capital and Financial Performance

Abstract

Purpose DuPont financial analysis is generally used in micro-economic studies to compare an individual firm’s financial performance with industry averages. The purpose of this paper is to undertake a macro-economic cross-sectional analysis of the determinants of return-on-equity (ROE) in USA, German and Japanese manufacturing firms. Design/methodology/approach The authors use cross-sectional log-linear multivariate regression analysis to determine the elasticity of ROE to changes in net profit margin (NPM), total assets turnover (TAT) and equity multiplier (EQM) in USA, German and Japanese manufacturing firms. The authors obtain the data for the analysis from the COMPUSTAT Research Insight/Global Vintage database. Findings With data for all manufacturing firms, the authors find that the most important determinant of ROE is NPM in all three countries. The least important determinant of ROE is TAT in the USA and Germany, and EQM in Japan. Electronics is the most important manufacturing industry in all three countries, the authors also apply the analysis to data for the electronics manufacturing firms in the three countries. The authors find that an increase of 10 percent in NPM increases ROE by about 9.8 percent in Germany, by about 8.3 percent in the USA, and by about 6.9 percent in Japan. An increase of 10 percent in TAT increases ROE by about 2.2 percent in Germany and by about 1.5 percent in Japan. An increase of 10 percent in EQM increases ROE by about 1.9 percent in Germany and by about 1.5 percent in the USA. Practical implications The empirical findings of this study can provide useful insights for financial managers regarding the determinants of ROE they should focus on to achieve the greatest impact on ROE. Originality/value DuPont analysis is generally used as a micro-economic tool at the firm level. This study is a macro-economic application of the tool to study the cross-sectional determinants of ROE at the industry level.

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References

2001Ratio Analysis and Equity Valuation: From Research to Practice 1993Some Differences in Corporate Structure in Germany, Japan, and the United States 2000Financial leverage changes associated with corporate mergers 2010The efficacy of principle‐based corporate governance practices and firm financial performance 1997CORPORATE GOVERNANCE AND CORPORATE PERFORMANCE: A COMPARISON OF GERMANY, JAPAN, AND THE U.S.1985Expected Utility, Debt‐Equity Structure, and Risk Balancing 2015Historical cost measurement and the use of DuPont analysis by market participants 2009The Du Pont Model: Evaluating Alternative Strategies in the Retail Industry

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