Long-Term Entropy and Profitability Change of United States Public Construction Firms

Abstract

A firm’s business composition and the sales volume of each business segment are subject to change depending, to a considerable extent, on the firm’s business strategy. These changes were first weighted and represented as a single index, referred to by scholars in strategic management and industrial organization research fields as “firm entropy,” then the impact of firm entropy on firms’ profitability was assessed over 12years. The performance differences between contractor and noncontractor firms, as well as focused and diversified firms, were compared through a longitudinal data analysis technique within a hierarchical linear modeling framework. Two hypotheses were formulated based on firm diversification theories and previous research findings. These hypotheses were tested according to the modeling outcomes, and implications are presented. The research findings indicate that the entropy changed constantly for both contractor and noncontractor firms. In addition, the level of firms’ long-term profitability supports the argument that the construction industry is highly competitive and mature.