Indicators of Successful Companies

Using monthly Compustat data for 478 companies covering the period 1982–1998, we investigate which factors discriminate between financially successful and less successful companies. Financial success is measured using three different methods, i.e., the Sharpe ratio, Jensen’s alpha, and EVA. We consider a total of 10 different company specific characteristics as potential indicators of superior performance. A binary logit model is applied to quantify the relationship between the individual firm characteristics and the probability that a particular measure of success will be greater or lower than the average for all firms considered. We also calculate the percentage correct prediction by the model for each measure of success. We find that especially large profitable firms with efficient working capital management and a certain degree of uniqueness regarding their business are the most successful companies.

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