Determinants of profitability in the EU-15 area

Using data on private firms in the EU-15 area over the period 2004-2011, we investigate the determinants of firm profitability. We extend existing models by considering possible nonlinear effects of typical micro-level determinants as well as the effect of additional micro-level and macro-level variables. Our findings – obtained using a plethora of econometric static and dynamic models – show that nonlinearities help explain the existence of conflicting theories of determinants of profitability (omitting second order effects may result in inconsistent estimates) and shed light on the role of the firm opportunity cost of capital, the majority shareholder commitment level and variables which reflect the economic cycle in explaining firm profitability.