Do profit margins expand for high growth firms?

Ertan, A, Lewellen, S and Thomas, J (2020) Do profit margins expand for high growth firms? Journal of Management Accounting Research, 32 (3). pp. 117-135. ISSN 1049-2127

Abstract

It is common in business analyses to invoke different efficiencies generated by scale. Growth is associated with declining average costs/sales and rising profit margins. Factors cited include the relatively fixed nature of some costs, increased bargaining power, and network effects. We investigate how different cost lines evolve for a sample of US firms after their IPO. To our surprise, costs/sales do not generally decline and margins do not increase, even during the early years when growth is highest. We observe similar results for other samples of domestic and overseas firms, both public and private. We explore possible explanations for our results and discuss implications, especially for cost allocation and financial projections.