Decomposing Dominant Capital

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Decomposing Dominant Capital

Postby blairfix » Thu Oct 23, 2014 6:05 pm

Giving an abstraction a name tends to give it concreteness. For instance, when I think of "dominant capital", I tend to think of some sort of uniform capitalist entity. Of course, we all know that dominant capital is hardly uniform -- indeed, its composition changes greatly over time.

An interesting question to ask is -- how long do firms tend to remain within dominant capital? I recently investigated this question, and the answer (perhaps not surprising) is not very long.

The chart below decomposes the top 400 COMPUSTAT firms (ranked by employment size) over the last 64 years. The result is a histogram, with the number of years spent as a top 400 firm plotted on the x-axis, and the percentage of firms having this duration plotted on the y-axis.

The average firm remains within the top 400 for only 16.3 years. However, the resulting distribution is highly skewed to the right. While half of all firms last less than 16 years, some firms remain within the top 400 for a very long time. Indeed, there seems to be a kernel of 33 firms that have remained within the top 400 for the entire period for which data is available. Interestingly, notice that this last data point is an extreme outlier, one that is not expected, given the probability distribution shown in blue. It seems that some firms find themselves in a privileged position (i.e. a position of power) from which it is difficult, or impossible, to be dislodged.

Top 400 Duration.png
Top 400 Duration.png (121.36 KiB) Viewed 2316 times
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Re: Decomposing Dominant Capital

Postby Jonathan Nitzan » Thu Oct 23, 2014 7:10 pm

That's a beautiful chart, Blair, and a step forward in the analysis of the Compustat ranking.

The next question to address is why firms leave/enter the top 400. Possible answers:

1. 'Greenfield' decay/growth
2. Merger/acquisition/divestiture
3. Large foreign-based firm delisting/lising in the U.S.
4. Privatization of a listed firm / listing of a private firm
5. Name change

In 1989, Fortune magazine published an article titled 'What Ever Happened to the Fortune 500 Top 50 of 1954?' (April 22, p. 88). The article showed that, of the top 50 firms in 1954, only 28 were still in the top 50 in 1988. The rest ‘disappeared’ –- though none disappeared because it became too small. Of the 22 firms that were no longer on the 1988 list, all remained very much at the top: 7 were still ranked in the top 300, 11 were acquired by other large firms, two went private, one was reclassified as a service firm and one was still on the list but under a new name.
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Re: Decomposing Dominant Capital

Postby DT Cochrane » Wed Nov 19, 2014 6:25 am

Agreed. It is a beautiful chart, both aesthetically and informationally.

Can I ask why you ranked the firms by employment?
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Re: Decomposing Dominant Capital

Postby DT Cochrane » Wed Nov 19, 2014 7:16 am

Hey Blair,
Inspired by this chart, I decided to check out the results for a CRSP 400 that I constructed in 2007. The CRSP goes back to 1925, so it's possible to check the durability over a longer time period, although this time using market capitalization as the ranking variable.

The result is not as visually stunning, but it is still statistically stunning with 12 firms in the ranking for the full 83 years, again well exceeding what the probability distribution would predict. Interestingly, the average duration was very close to your result, 15.1 years compared to 16.3 years.

If we look at the make-up of the 12 we that a full third are oil companies, while another two are energy firms. Also in the mix is GE, Coca-Cola and GM (whose recent history withing DC is very interesting).
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Re: Decomposing Dominant Capital

Postby blairfix » Wed Nov 19, 2014 3:48 pm

Very interesting work, Troy. What is this CRSP database you speak of? I'm interested in extending my dataset prior to 1950.
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Re: Decomposing Dominant Capital

Postby DT Cochrane » Wed Nov 19, 2014 6:40 pm

blairfix wrote:Very interesting work, Troy. What is this CRSP database you speak of? I'm interested in extending my dataset prior to 1950.


Hi Blair,
It's the Centre for Research in Security Prices. You can access the database through the York Library, although I think it may also be accessible through WRDS. It has more than a few errors that need to be corrected in order to really make a comprehensive CRSP 400. Also, where it once had an option to download the yearly market cap, that now needs to be calculated. I've encountered some issues with the number of outstanding shares and the share price that need to be addressed, although if you're working at a yearly scale it should be too big of a problem.
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Re: Decomposing Dominant Capital

Postby DT Cochrane » Wed Nov 19, 2014 7:19 pm

I also had the data for the Fortune 500 from 1955 to 2008. Fifty-four of the firms (2.2%) have endured the entire time. There was also a large spike of firms that had endured for 14 years, which I think signifies those firms who were included for the first time when the list changed from strictly manufacturing companies and have lasted since.
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