s8(vol.12,No.23) ANALYSIS change, with deeper integration of national markets profit indicators measured, EU variances in profitability ents and intermediaries. 20 s always lower than that of Japan, but not always lower In equity markets the introduction of the Euro elimi- ROA for the EU chemical industry has a lower variance border equity investments. l Internationalization of eg: from this analysis that the variance of profitability in border mergers and acquisi the European Union is not generally higher than that of tions, and the consolidation of stock exchanges have other markets considered fully integrated, particularly enforced cro sS-border activities. In addition it is also Japan. Therefore, based on their analysis, there is no evident that investor behavior has changed fror country-based toward cross-border investments. Al reason to conclude that company profits in the euro- pean Union are more dispersed than in other fully inte though national differences between stock markets re- main with respect to market capitalization and the A comparison of the profitability spreads between number of initial public offerings(IPOs)22 these are enterprises of different size(small versus large)on the probably more an indication of in ncreased regional spe cialization and concentration of equity markets (ex basis of the BACH database results in a considerably lower profit spread for the observed eur hanges) in an integrated European market. However, tries than in Japan and the United States. 2 The same due to the liberalization of capital markets and global study also compares profitability results among differ zation, the market for wholesale financing has devel ent European countries. However, because no statistical oped substantially and has become more integrated and test is applied the results are difficult to interpret, and ompetitive. It seems that larger companies in particu- no clear result regarding profit convergence can be de- lar have access to international financing markets rived. An extensive study of financial structure and whereas only very small firms still depend on their local profitability based on the Bach database does not de- financial system." rive results regarding the comparability of European companies'profits either, and therefore does not con- D. Profit Convergence tribute to the authors' investigation 30 The same conclu- sion applies to a study of the German Bundesbank com- (defined as profits after operating ex hich finds that be. s)convergence by independent companies oper- cause of diverging financial structures this PlI does not the eu member states is the mea provide a reliable basis for international profitability convergence that is most consistent with the transfer pricing question "Is Europe One Market? ""for the appli Criton and Walton examine the ratio of profits to ation of the TNMM and related transfer pricing meth capital employed of Euro-area countries and their ma- ds. Although no research was found that directly ad- or trading partners and concl dresses this question from a transfer pricing perspec ive, there is research that investigates company furthe ged in the Euro area, 3a houe that profits have not described (unclear database and num profitability within the EU and compares and contrasts re, the authors cannot the findings to those in other significant markets, such evaluate how representative their results are. Further as the United States and Japan more, their conclusions are not based on statistical Meric et al. compare the profitabi of Japanese, EU tests. Moreover, their profit level indicator seems to be and U.S. manufacturing firms operating in three major based on an arbitrary determination of the asset base manufacturing industries(chemicals, industrial In addition, their potential explanations for the devia hinery,and electronics)over the 1996-2000 period. 2-4 tions (investment flows are insufficient to reduce profit the operating profit margin (OPM,and the return on area, that is, EU Company data constitutes one sample which using a multivariate analysis of variance. 2One of the is compared to the U.S. and the Japanese data samples findings is that, for the ROA, OPM, and other relevant aged by the European Commission(DG for Economic and Fi- zed Databank"is ncial Affairs). It contains aggregate and harmonized infor 2o See"Commission of the European Communities, The covers 11 European countries, Japan and the U.S. for the years Euro Area In The World Economy-Developments In The First 1990-1996. It includes less than /40, 000 European companies Three Years, "p, 30 ff n of the European Communities, p. 34 f The data is mainly provided by Central banks or Ministries of See Et the respective policy, Rest the 2002 scoreboard, SEC (2002)1213 Commission, Directorate-General For Economic and Fiscal Af an Commission, Directorate-General For eco- Than Meric et al."A Comparison of the Financial Char- nomic and Fiscal Affairs, Supplement A, No 11/12,1998 acteristics of U.S. E U, and Ja Firms mparison Between the Finan The OPM is the ratio of operating profit (profits related to operating activities before interest and taxes) to sales. Ope Using the BACH Database, " Economic Paper,Nr155,July ating profits and net profits are used interchangeably in this 3I The ROE is equai to a fiscal year's after-tax income di The ROA is equal to operating profit (profits related to vided by the book value of equity operating activities before interest and taxes) divided by aver- lur Unternehmensrentabilitat They use the Disclosure Worldscope database for the riton, Laura, Walton, Richard:"International Compa analysis. The EU is considered as one integrated economic 2002 on of Company Profitability, " Economic Trends, No 587 1404 Copyright 2004 TAX MANAGEMENT INC, a subsidiary of The Bureau of National Affairs. inc. TMTR SSN 1063-2069