A Multigroup Structural Equation Approach: A Demonstration by Testing Variation of Firm Profitability Across EU Samples

Abstract

We extend standard methodology for multigroup mean and covariance structure (MACS) analysis to the case where assessment of across-group variation of model parameters is the focus of the study and the data deviate from standard assumptions. The proposed methods are applied to analyze an accounting profitability database covering more than 100,000 firms in the 15 European Union (EU) countries in the period 1999 to 2003. A multivariate model with permanent and dynamic latent components of profitability is used to assess across-country variation of firm level profitability and persistence. We show that there are substantial differences among these countries, despite the partial integration of their economies. Estimation of supplementary parameters are proposed as a way to characterize persistence in each country, as well as across-group variation of model parameters. This methodology is more widely applicable in international organizational research.