Determinants of Profitability: An Empirical Investigation Using Australian Tax Entities*

This paper uses a sample of 180,738 tax entities from the full Australian Tax Office (ATO) tax return data to investigate the determinants of profitability. The sample of Australian tax entities are averaged over the period 1994/95 to 1996/97. Analysis is carried out at a 3 digit ANZSIC level of classification. Using simple regression techniques the analysis suggests that size of entity is positively related to profitability but industry characteristics have limited importance in explaining entity profitability. Concentration, defined at a 4 digit level, is positively and significantly related to entity profitability in 27% of Australian 3 digit industries, while a significant negative association is found in 8% of the industries. There is some evidence that barriers to entry have the positive relationship with entity profitability as dictated by theory when proxied by the industry capital intensity but not when proxied by the minimum efficient scale or industry trademark intensity. There is strong evidence that the market share of an entity has a U-shaped relationship with profitability.