Making profit in a declining market: Which capabilities and strategic actions determine profit growth of newspaper firms in Europe and the US?

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Making profit in a declining market: Which capabilities and strategic actions determine profit growth of newspaper firms in Europe and the US?

MSc Thesis IE&B 08-‐07-‐2013

Stefan Kapell S2224127

s.w.w.h.kapell@student.rug.nl

Supervisor:

dr. M.S.S. Krammer

Co-‐assessor dr. B. Los

University of Groningen Faculty of Economics and Business

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Abstract

This paper tries to explain the influence of several capabilities and strategic actions on the profit of newspaper companies. First capability included in this paper is specialization.

Specialization in terms of topic of a newspaper has a positive effect on the profit. Specializing in a regional way has a negative relationship with profit. Second variable is an acquisition. This seems to have a positive effect on the profitability. positive effect on the profitability.

Downsizing the organization, the third variable, is negative since more employees leads to more profits. However, this relationship is non-‐linear.

Keywords: Newspaper industry, capabilities, strategic actions, profitability

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1. Introduction

According to Warren Buffet, newspapers are not dead. That’s what the famous investor wrote to the shareholders of his company at the beginning of 2013. To underwrite his confidence in the industry he announced the acquiring of almost thirty newspapers. Despite this positive sign, the newspaper industry is not flourishing like several decades ago. This paper tries to

investigate what is necessary for newspaper firms to keep extracting profits from the

newspaper business. For years now, the newspaper industry is dealing with the question how a printed form of news can survive in a market where Internet becomes more important. Almost a century ago, the newspaper was the most used form of gathering information. In the 1920s and 1930s the circulation of newspapers declined due to the introduction of radio broadcasting (Jackaway:1995). With the introduction of the television, newspapers adjusted their role in society from brining news, to providing a background with the news. With the growing usage of the Internet around the 2000’s, the newspaper industry experienced again severe competition.

Not only within the media industry as a whole, competition increased. Within the printed news sector, the competition may even have increased more. In Europe as well as in the United States, circulation numbers are falling over the last years as can be observed from figure 1.

Since the declining trend of circulation numbers in Europe and the US already can be observed prior to 2008, the question raises how newspaper companies can extract profits from their activities.

Figure 1: Circulation of newspapers per region (Source: World Press Trends 2012 -‐ WAN-‐IFRA)

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Up until now several papers already looked into the newspaper industry. The paper by

Kranenburg et al (2002) looks at the firm survival determinants of Dutch newspapers over the period 1950 until 1996. The authors find that industry-‐specific, as well as firm specific effects have a significant impact on the firm survival rates of newspapers in the Netherlands. The authors do not find evidence for macro-‐economic effects on the survival chances. This changed according to the World Press Trends (WAN-‐IRFA: 2010), which dedicate the severe drop in circulation numbers in 2009 in Europe and the US to the global financial crisis. Picard and Rimmer (1999) explore the financial performance of fifteen US-‐based newspaper companies during the economic downturn in 1990 and 1991. They find that firms that diversified from newspaper activities performed financially better.

This research tries to add value by looking at newspaper firms from Europe and the US. Both markets are subject to a declining demand. In this research I will focus on which strategic actions a firm can take to increase these profits. The central question of this research is thus:

How can a set of capabilities and strategic actions determine the profitability of a newspaper company in the declining markets of Europe and the US? It tries to add to the consisting

literature on capabilities that are important to survive in a declining market like the newspaper industry.

To address the formulated research question I will build on the resource-‐based-‐view. This view is based on the assumption that capabilities are heterogeneous across firms, and that these firms can obtain a competitive advantage by effectively exploiting these capabilities (Barney:

1991).

This research aims to find the relation between several strategic actions and financial

performance. The emphasize lies on three capabilities and strategic actions comparable to the research by Li et al (2010). First, a company can serve a large part of the market or it can specialize in a certain topic or region. According to Harrigan (1980) specialization and serving a niche is a common strategy for firms in a declining market. Next to that, a company can

increase its profitability by acquiring another company. In this way it can benefit from

economies of scale or scope (Anand and Singh:1997), or it can specialize in a certain type of

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newspaper. A third strategic action a newspaper firm can take is a lay-‐off round to decrease the costs of salaries by decreasing the number of employees. This is a well-‐known action taken by companies active in the newspaper industry and is often used as a cost-‐cutting strategy which should lead to an increase in profits (Mentzer:2005).

To answer the research question I use data on 24 firms from Europe and the US over a time period of ten years (2002-‐2011). I use data on the financial performance, the newspaper portfolios of the firms, whether they engaged in acquisitions and data on the number of employees. With this dataset I should be able to test the capabilities and strategic actions. The methods are in line with related researches.

According to the results, specialization is a partially profitable strategy for newspaper firms. A higher share of topic-‐specialized newspapers leads to higher profits. However, this is not the case for regional specialized newspapers. In this case there is a significant negative effect of a higher share of regionally specialized newspapers on profit.

Acquisitions have a significant positive effect on the short-‐ and mid-‐term. Organizational downsizing is not a profitable strategy, since more employees lead to higher profits. However, in this case there is a difference between small and large firms.

These results contribute to a better understanding of possible strategies in a declining industry like the newspaper industry. They partially explain the current trends in the industry as well as giving new insights.

The paper is structured as follows: section two gives an overview of relevant literature and states the hypotheses. Section three includes information on the data and the fourth section explains the methods used in this paper. The fifth section includes important preparations and statistical checks before the sixth section shows the results and the data analysis. In the seventh and final section, the paper concludes and presents the implications and several limitations and propositions for further research.

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2. Theory

In this section I will give an overview of related researches and derive the hypotheses. In the first part of the literature review I will elaborate on the newspaper industry and why it is a declining industry. Part 2.2 focuses on the first capability, specialization, in terms of topic-‐

specialization and regional-‐specialization. Part 2.3 gives an overview of the related literature on acquisitions and the relation with profit. In part 2.4 I will elaborate on downsizing the

organization. Part 2.5 finally gives a short overview of the hypothesized relationships via a conceptual model.

2.1 Newspaper industry as a declining industry

The paper by Muehlfeld et al (2012) defines the newspaper industry as a declining one, especially in the US and Europe. The circulation numbers of newspapers in Europe and the US show a similar trend and so does the development of the employee numbers within the industry. The role of newspaper shifted over the last decades from serving audience with the latest news, to providing a background with the news. Several other forms of media have taken over the former task. Nevertheless it still can be attractive to stay active and invest within a declining market.

Porter (1998) identifies several determinants of competition in a declining industry. On the demand side, firms are confronted with a decline in demand. This leads to uncertainty about future demand as well as uncertainty about the rate and pace of the decline. In third place, the firms do not know how the structure of the remaining demand looks like. Exit barriers also determine the competition within a declining industry. Examples of exit barriers are

investments in durable and specialized assets like for example assets that only can be used to

produce a certain good. Also the existence of social barriers with undesirable consequences like

unemployment can be seen as an exit barrier. Porter (1998) also develops a framework to

determine the strategy for a firm in a declining market. In the first place a firm has to decide

whether it has competitive advantages over the other firms in the industry. Then the firms

needs to determine if the industry structure is favorable or not for decline. An industry is

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favorable for decline if there are for example low exit barriers. Also a high brand loyalty of customers and the possibility to defend a niche can be reasons why staying active in a declining industry can still be profitable. If both the structure and the strengths are determined, a firm can decide on its strategy. In case the firm has competitive advantages over competitors and is active in an industry favorable to decline it can take a leadership role within the market, or it can decide to focus on a niche market and exploit a set of competitive capabilities. If the industry is favorable to decline, but the firm does not have enough competitive advantage, it can apply a harvest strategy and cut on cost, or quickly divest from the market. (see figure 2)

Figure 2: Porter framework on competitive strengths and declining industry structure (Source: Porter (1998)

The paper by Harrigan (1980) shows that there are several examples of declining industries in which firms made profits by staying active in the market and invest. Harrigan (1980) shows that there are several considerations to determine whether investing in a declining market is still profitable or exiting the market is more favorable. If the products are highly price sensitive, it becomes less attractive due to an increase in uncertainty. If the products are highly price sensitive, it becomes less attractive. Another reason keep investing in a declining market is the existence of a group of loyal customers who are not likely to give up on the product in the near future. Also a clear view on replacement units needed in the future, can make a declining market attractive. On the other hand, if the demand for the good falls sharply or a there is a substantial need for large investments, a firm can decide to exit the market.

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2.2 Specialization

Porter (1998) states that a firm has to deal with several trade-‐offs regarding strategy. A trade-‐

off means according to Porter (1998, p57): “more of one thing necessitates less of another”. It occurs when activities are incompatible. Porter gives three reasons for the existence of trade-‐

offs. First there are inconsistencies in the image or reputation of a brand. The same holds for activities. Different actions require different products, equipment and management systems.

Lastly there are limits on internal coordination. Managers decide to compete in one way with competitors and not in another way.

According to Kotler and Keller (2006) a product needs to be differentiated to be able to brand it. There are different forms of differentiation of a product. Products can come in different form (size or shape), with different features, qualities or style. Next to product differentiation, a firm can also differentiate in the field of service. For example in the areas of delivery or the

consultation of customers.

Although differentiation and the offering of a full-‐line of products are two different strategies a firm can choose between, it does not mean a firm cannot do both at the same time. Porter (1998) elaborates more on this trade-‐off via several examples. He argues that offering different types of products can harm a brands name. When a company offers differentiated products as well as products competing on price, customers can get confused about the specifications of a brand. In the newspaper industry this is slightly different. Customers decide to read a certain newspaper because of several characteristics of the product. The publisher behind this (which often owns several other newspaper titles) is not of a large importance.

Within the newspaper industry, there are two main fields of differentiation. One strategy of a newspaper company can be to specialize in a certain topic or area. This leads to a better identification of the target group and hence a company can more effectively look for the existence of a group with the same needs. These groups are often more loyal, because they share the same interest (Harrigan: 1980). There are several major newspapers focusing on business and economy (for example: Financial Times and the Wall Street Journal) or like the Italian sports-‐newspaper ‘Gazzetta Dello Sport (WAN-‐IFRA: 2012).

On the other hand, there is specialization in terms of region. A distinction can be made

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between nationwide or region-‐bounded newspapers. The area in which the newspapers are distributed determines this.

The paper by Kranenburg et al (2002) investigates the determinants of survival in the Dutch newspaper industry in the period from 1950 until 1995. The authors divide the period into three sub periods of each fifteen years. In the second sub period (1965-‐1980) they find a significant negative relation between publishing a regional newspaper and exit chances. This indicates that for this period, being a regional newspaper increased the chances of survival.

However, the third period (1980-‐1995) shows that also this type of dailies was exposed to increasing competition and increasing concentration of the market.

From the literature it remains vague whether specialization has a positive or a negative effect on the profitability of a newspapers firm. Arguments go in both directions and therefore I formulate the following hypotheses.

H1a: Specialization has a positive effect on the profitability of a newspaper firm

It is also possible that the optimal portfolio of dailies a newspaper company owns consists of both nation-‐ and topic wide papers as well as specialized ones. This would imply that there could exist a non-‐linear relationship between specialization and the profitability of a newspaper firm. Therefore I formulate a second hypothesis:

H1b: There is an optimum in the non-‐linear relationship in the share of specialized and non-‐

specialized dailies a newspaper company owns.

There is a possibility that newspaper firms engage in both types of specialization at the same time. If a firm wants to specialize it needs certain capabilities (Harrigan: 1980). Figure 2 states that a firm with competitive strengths can decide to serve a certain part of the market, a niche.

Different niches need different competitive strengths and capabilities. Therefore it is likely that engaging in regional specialization and topic-‐specialization at the same time has a negative effect on profit also because serving different niches does not lead to advantages from economies of scale. Therefore I hypothesis:

H1c: Engaging in both regional specialization and topic specialization at the same time has a negative effect on the profit of a newspaper company.

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2.3 Acquisitions

If a firm is desperate for growth and is unable to wait for organic growth on the demand side, an often-‐used strategy is acquiring another firm (Kim et al: 2011). The paper by Anand and Singh (1997) suggests that acquisitions within a declining industry are a well-‐known

phenomenon. The authors make a distinction between diversification-‐oriented acquisitions and consolidation-‐oriented acquisitions. Where the former focuses on acquiring other firms to diversify into other activities, the latter form is about acquisitions in a horizontal way. Via this type of acquisition profitability should increase due to an increase in efficiency as well as more market power.

Annand and Singh (1997) classify the US defense sector as declining and use this industry to look at the performance of acquisitions. The authors test the hypotheses that a consolidation-‐

oriented acquisition performs better in a declining market than a diversification-‐oriented acquisition. Their second hypothesis states that a consolidation-‐oriented acquisition performs better in a declining market than in a growing industry. The authors test the performance by using the abnormal stock market returns of the companies. The authors find support for their hypothesis and thus conclude that a firm in a declining market can benefit from a horizontal or related acquisition. This is not also the case for the stock market returns, but also for the post acquisition operating performance.

Mei and Sun (2008) perform an event study within the US forest products industry. The authors measure the impact of both mergers and acquisitions on the financial performance of a firm in terms of daily stock return. They find a short-‐term positive effect on the financial value of both the target and the acquiring firm. Longer term effects are however not part of the research by Mei and Sun (2008). However, the authors state that an acquisition is often part of a value maximization strategy. This means that the acquiring firm often already has a partial interest in the target firm, and that thus the acquisition is part of a long-‐term strategy. This can include a better control of the market or benefits from economies of scale. The paper by Capron (1999) focusses on the long-‐term effects of horizontal acquisitions. He finds that both cost-‐ and

revenue-‐based synergies contribute to the performance of an acquisition. The author also finds

that a benefit of a horizontal acquisition is an increase in benefits due to a larger coverage of

the market. I derive therefore these hypotheses:

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H2a: A consolidation-‐oriented acquisition has a positive short-‐term effect on the profitability of a newspaper firm.

H2b: A consolidation-‐oriented acquisition has a positive long-‐term effect on the profitability of a newspaper firm.

2.4 Downsizing

Organizational downsizing, and especially downsizing the workforce, is a method to save cost and to improve organizational efficiency. Nowadays it is a widely used method to increase the competitiveness of a firm (Nair: 2008). According to Nair (2008) there are two forms of

downsizing. The proactive form refers to downsizing in case the firm wants to increase

efficiency and competitiveness. The second form, reactive downsizing, refers to the scenario in which a firm has to downsize activities in order to avoid a bankruptcy.

Within the literature two streams of the effects of downsizing can be observed. On the one hand there are authors like Mentzer (2005) who argue that the downsizing strategy is a beneficial one due to the fact that it is a cost-‐cutting strategy that can also motivate the employees that can stay at a firm.

On the other hand there are authors like Cascio (1993) who think that the downsizing strategy is a harmful one. It has hidden costs and the organization loses knowledge and expertise due to layoffs. According to Ali Shah (2007) it is generally believed that the lay-‐off of employees results in an improvement in a firms profitability as long as the benefits exceed the costs of firing people and training new employees.

Yu and Park (2006) find a positive effect of downsizing on the financial performance. They find that the strategy of downsizing was implemented in almost half of the Korean firms during the crisis from 1997 to 1999. Firms that laid-‐off employees recorded significantly better financial results. This is mainly due to the fact that downsizing decreases the labor costs of a firm.

However, there are also studies that do not find a significant positive relation between

downsizing and financial performance. The study by Cascio et al (1997) finds that for US firms,

there is no direct link between downsizing the labor force and the financial performance. Two

years after the downsizing operation a small difference was observed. The employment

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reducing companies in the sample of Cascio et al (1997) reduced their workforce by an average of 10.5 percent. This led after two years to an increase in return on assets of 0.3 per cent compared to their industry average.

Another paper that finds a negative relation between downsizing and financial performance is the research by Muñoz and Sanchez (2010). They find that in the year after a downsizing operation the effects on financial performance are negative. Another finding is that the size of downsizing plays a significant role. Especially firms that laid-‐off a large amount of their

employees experienced a relative lower financial performance. Therefore I derive the following hypotheses:

H3a: Downsizing has a short-‐term negative effect on the financial performance of a newspaper company.

H3b: Downsizing has a longer-‐term (t+1 and t+2) positive effect on the financial performance of a newspaper company.

H3c: There is an optimum in the non-‐linear relationship in amount of organizational downsizing.

2.5. Conceptual model

The conceptual model is provided in figure 3. It gives an overview of the capabilities and the strategic actions discussed in this section. The plus or minus specifies the type of relationship I expect from the literature review and is in line with the hypothesis.

Figure 3 Conceptual model

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3. Data

Testing the influence of various capabilities on the firm performance is a well-‐known topic in the literature. Performance can be measured in several ways. Papers like Li et al (2010)

measure performance of a firm in terms of survival rates. Their regression is based on a binary model, which distinguishes between stay in the market (0) and exit the market (1). Advantage of this method is that the outcome gives a clear overview of which capabilities are important to stay in the market. Because capabilities are related to exit-‐ratios, the outcome is a cut-‐off of what is important to stay active. Disadvantage of this method in relation to this research is the fact that this requires a large database of firms that combines companies that stay active in the market and companies who decided to exit. Since the newspaper industry consists of a lot of firms holding more than one title in their portfolio, exit-‐ratios of firms are not high. However, a lot of newspaper titles where part of an acquisition in the past ( Muehlfeld et al: 2012).

Important take-‐away from this method is the use of panel data and lagged data. Since this is also the case for this paper, I will partly follow the method of Li et al (2010).A second measure of performance is the market. Anand and Singh (1997) use data on stock market returns to measure the performance of several strategies including acquisitions. Advantage of using the market to value a strategic action is that the fluctuation of a stock price can be directly attributed to an event. Disadvantage is however that these fluctuations are only based on public available information, whereas acquisitions are a complex transaction (Anand and Singh:

1997). Using data on stock performance is not preferred for this research, since an event study needs daily data on the stock performance of all the firms (Mei and Sun: 2008). Moreover, several large companies within this research are not listed on a stock market.

Another way of measuring the impact of capabilities on firm performance is via the impact on financial performance. Morgan et al (2009) use a firms profit growth rate as dependent

variable. Their independent variable consists of several marketing capabilities. The idea to test the impact of capabilities on the financial performance of a firm is similar to the intention of this paper. Advantage of this method is that this does not require a large database with exit-‐

ratios like the research on firm survival. Disadvantage of this method is that the authors do not

make use of panel data. However, this is possible if I combine both the methods of Morgan et al

(2009) and Li et al (2010) to arrive at a model which measures the impact of several capabilities

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on financial performance while using panel data.

The dataset contains data on 24 newspaper companies from Europe and the United States of America that have a minimum total circulation of 300.000 paid and daily newspapers. This research uses panel data from the companies for the time period between 2002 and 2011. Part of the data is obtained from the Orbis database. This database contains financial information of more than 75 million companies and includes both databases Amadeus and Reach. This

database fits this research well in such a way that it contains all the necessary information on the financial performance of companies as well as the development of the number of

employees. Finacial data in this database is in euros and if necessary the currency is transformed based on a yearly rate.

The data on the titles a newspaper firm owns as well as the regional and topic specialization part is obtained by using a combination of all the yearly reports of the companies and the Zephyr database. In almost all cases the yearly reports of the firms give an overview of the newspapers the companies owns including a short description. In some cases, data on the newly acquired newspaper type is obtained from the Zephyr database. This database contains information on mergers and acquisitions per firm and includes names of the newspaper titles.

The time period 2002-‐2011 is chosen based on the fact that since 2000 the printed newspaper industry faced increasing competition from the Internet. This led in turn to the shift in demand for printed newspapers and changed the environment of the printed newspaper industry into a declining one. Compared to similar research this time period is long enough to cover the impact of the strategic actions over time.

The dependent variable in this research is the profitability of a firm (i) (Profit) in time t. This is

in line with several studies like Muñoz and Sanchez (2010) and Yu and Park (2006). Within the

model this variable is divided by 1000. The independent variables are Tspec for newspapers

specialized in a topic and Rspec for newspapers specialized in a region. These variables are

determined by their description in the financial reports of the companies. Since a newspaper

company often owns more than one newspaper title, the portfolio of titles is examined. Both

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variables are thus a percentage of the specialized newspapers a company owns, compared to the total newspaper titles the company owns.

𝑆ℎ𝑎𝑟𝑒𝑇𝑠𝑝𝑒𝑐

_!"

=

_!^!^!"

!"

(This also holds for regional specialized newspapers, so T=R) (2)

Equation 2 shows how the variables are calculated. The share of topic specialized newspapers a company owns (ShareTspec) is derived by dividing the number of topic specialized newspaper by the total number of newspapers are company owns. The same equation holds for regional specialized newspapers (ShareRspec). Several examples of specialized newspaper from the database are presented in table 5 and table 6 in the appendix.

A second strategic action of a company is doing an acquisition. Within this research this variable is measured as a dummy. It takes the value 1 in case a firm did one or more acquisitions in year t. Within this research I will only focus on the consolidation-‐oriented acquisitions. I will use the classification following Anand and Singh (1997) to distinguish between consolidation and diversification-‐oriented acquisitions. To determine whether the acquired firm has overlapping business activities, I control for the 4-‐digit SIC code. This code classifies industries and is assigned by the US government. The database used for this research reports the SIC-‐code for both the acquiring and the target firm. Via this code, consolidation oriented acquisitions can be distinguished by only selecting acquisitions where a company from the sample acquires a company with this SIC code. An example of the distinction between consolidation-‐ and diversification-‐oriented acquisitions is provided in picture 1 and 2 in the appendix.

The third strategic action a company can engage in is organizational downsizing. This is

measured via the number of employees a firm has in a year. Often the data is mathematically transformed to simplify the interpretation of the coefficients. Within this research this is not possible due to the fact that this would lead to a large drop in the number of observations. This because I deal with variables which take the value 0 or variables that have a negative value.

Using the natural logarithm, which is often done to interpret the coefficients as a change in percentages, is not an option.

Table 1 presents the summary statistics of the variables.

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Table 1 Summary Statistics

4. Model:

𝑃𝑟𝑜𝑓𝑖𝑡

_!"

= 𝐶𝑜𝑛𝑠𝑡 + 𝑆ℎ𝑎𝑟𝑒𝑇𝑠𝑝𝑒𝑐

_!"

+ 𝑆ℎ𝑎𝑟𝑒𝑅𝑠𝑝𝑒𝑐

_!"

+ 𝐴𝑐𝑞𝑢𝑖𝑠

_!"

+ 𝑂𝐷𝑆

_!"

+ 𝑥

_!

𝑆𝑖𝑧𝑒

_!"

+ 𝑥

_!

𝐶𝑜𝑛𝑡

_!

+ 𝑥

_!

𝑌𝑒𝑎𝑟

_!"

+∈ (1)

The basic model aims to measure the impact of several capabilities and strategic actions on the

profitability growth of newspaper firm. Since I use data over different years, it is important to

notice that the method should allow for panel data. On the left-‐hand site the variable Profit

determines the net-‐income of a firm i in year t. On the right-‐hand side, Const represents the

constant in the regression. ShareTspec denotes the share of top-‐specialized newspapers a

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company i owns in year t. ShareRspec represents the share of regional-‐specialized newspaper a company i owns in year t. The variable Acquis is a dummy variable that takes value 1 in case a firm i did a consolidation-‐oriented acquisition in year t. The variable ODS represents the organization downsizing of a firm i in terms of employee numbers in year t. Control variables are Size, measured as turnover for firm i in year t, Cont for firm i as a distinction between the continent of origin, where Europe takes value 1 and the time trend Year.

𝑃𝑟𝑜𝑓𝑖𝑡

_!"

=

𝐶𝑜𝑛𝑠𝑡 + 𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑇𝑠𝑝𝑒𝑐

_!"

+ 𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑇𝑠𝑝𝑒𝑐

_!"^!

+ 𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑅𝑠𝑝𝑒𝑐

_!"

+ 𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑅𝑠𝑝𝑒𝑐

_!"^!

+ 𝛽

_!

𝐴𝑐𝑞𝑢𝑖𝑠

_!"

+ 𝛽

_!

𝐴𝑐𝑞𝑢𝑖𝑠

_{! !!!}

+ 𝛽

_!

𝐴𝑐𝑞𝑢𝑖𝑠

_{! !!!}

+ 𝛽

_!

𝑂𝐷𝑆

_!"

+ 𝛽

_!

𝑂𝐷𝑆

_{! !!!}

+ 𝛽

_!"

𝑂𝐷𝑆

_{! !!!}

+

𝛽

_!!

𝑂𝐷𝑆

_!"^!

+ 𝑥

_!

𝑆𝑖𝑧𝑒

_!"

+ 𝑥

_!

𝐶𝑜𝑛𝑡

_!

∈ (3)

The basic model (1) will be extended in several ways to test all the hypotheses. This total model is shown in equation 3. The independent variables are tested separately per hypothesis.

𝑃𝑟𝑜𝑓𝑖𝑡

_!"

= 𝐶𝑜𝑛𝑠𝑡 + 𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑇𝑠𝑝𝑒𝑐

_!"

+ 𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑇𝑠𝑝𝑒𝑐

_!"^!

+ 𝑥

_!

𝑆𝑖𝑧𝑒

_!"

+ 𝑥

_!

𝐶𝑜𝑛𝑡

_!

+∈

(4)

Equation 4 shows model 1. Within this model the effect op topic specialization and the existence of a non-‐linear relationship are tested. This model is developed to partially test hypothesis H1a and H1b. According to the hypothesis on specialization (H1a), I expect beta 1 to be positive. Beta 2 is the coefficient of interest to test H1b. This hypothesis suggests a U shaped relationship. This can be a normal U-‐shape or an inverted U-‐shape The normal U-‐shape suggest a relation that is negative in case there are a few specialized newspapers and becomes more profitable if the share of specialized newspapers increases. This research however expects that the relation consist of an inverted U-‐shape, indicating that variance is positive. In case the share of topic-‐specialized newspapers increases, the profit of a company also increases, up to a certain optimum, where profitability again decreases in case more specialized newspapers are added. This means that beta 2 should report a negative value.

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𝑃𝑟𝑜𝑓𝑖𝑡

_!"

= 𝐶𝑜𝑛𝑠𝑡 + 𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑅𝑠𝑝𝑒𝑐

_!"

+ 𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑅𝑠𝑝𝑒𝑐

_!"^!

+ 𝑥

_!

𝑆𝑖𝑧𝑒

_!"

+ 𝑥

_!

𝐶𝑜𝑛𝑡

_!

+∈

(5)

To test the regional-‐specialization part of both hypotheses H1a and H1b, I introduce model 2 (equation 5). Within the model I introduce the ShareRspec term as well as the squared term to check if the relation between specialization and profit growth is non-‐linear. For this model the expectations are in line with the expectations in model 1. I expect beta 3 to take a positive value and beta 4 to be negative.

𝑃𝑟𝑜𝑓𝑖𝑡

_!"

𝐶𝑜𝑛𝑠𝑡 𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑅𝑠𝑝𝑒𝑐

_!"

𝑥+ 𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑇𝑠𝑝𝑒𝑐

_!"

(𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑅𝑠𝑝𝑒𝑐

_!"

𝑥𝛽

_!

𝑆ℎ𝑎𝑟𝑒𝑇𝑠𝑝𝑒𝑐

_!"

) + 𝑥

_!

𝑆𝑖𝑧𝑒

_!"

+ 𝑥

_!

𝐶𝑜𝑛𝑡

_!

+∈ (6)

Equation 6 is designed to test hypothesis H1c. This hypothesis states that engaging in both types of specialization at the same time has a negative effect on the profit of a newspaper company. I therefore expect the coefficient of the interaction variable to be negative.

𝑃𝑟𝑜𝑓𝑖𝑡

_!"

= 𝐶𝑜𝑛𝑠𝑡 + 𝛽

_!

𝐴𝑐𝑞𝑢𝑖𝑠

_!"

+ 𝛽

_!

𝐴𝑐𝑞𝑢𝑖𝑠

_{! !!!}

+ 𝛽

_!

𝐴𝑐𝑞𝑢𝑖𝑠

_{! !!!}

+ 𝑥

_!

𝑆𝑖𝑧𝑒

_!"

+ 𝑥

_!

𝐶𝑜𝑛𝑡

_!

+∈

(7)

Equation 7 shows the model to test both hypothesis H2a and H2b. First of all the effect on profit of an acquisition is tested. However, several papers like Mei and Sun (2008) and Schmidt and Fowler (1990) introduce a lagged term to determine the effect of acquisitions on firm performance. Since an acquisition is a costly strategic action, it is possible that there is a difference in the financial performance over time. I introduce two lagged terms of t+1 and t+2 to determine the longer-‐term effect of an acquisition. Beta 5 is important to find evidence for hypothesis H2a. This dummy variable takes value 1 in case a firm did a consolidation-‐oriented acquisition. Beta 5 reports a positive value in case a consolidation-‐oriented acquisition has a positive effect on the profitability of a newspaper company as hypothesis H2a states. The same holds for beta 6 and beta 7 which take a positive value in case an acquisition is positive

respectively one and two years after the initial acquiring date. These two parameters test

hypothesis H2b that states that an acquisition has a positive longer-‐term effect.

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𝑃𝑟𝑜𝑓𝑖𝑡

_!"

= 𝐶𝑜𝑛𝑠𝑡 + 𝛽

_!

𝑂𝐷𝑆

_!"

+ 𝛽

_!

𝑂𝐷𝑆

_{! !!!}

+ 𝛽

_!"

𝑂𝐷𝑆

_{! !!!}

+ 𝑥

_!

𝑆𝑖𝑧𝑒

_!"

+ 𝑥

_!

𝐶𝑜𝑛𝑡

_!

+∈

(8)

Equation 8 is designed to test the effect of organizational downsizing on the profit of a

newspaper company. According to the paper by Cascio et al (1997) the effect of downsizing can also be lagged. Therefore I introduce a lagged downsizing term of t+1 and t+2. Beta 8 is the parameter of interest to test hypothesis H3a. The hypothesis expects to find a negative

relationship between profitability and organizational downsizing. Therefore we expect beta 8 to be negative. Beta 9 and beta 10 are the parameters of interest to test whether there exists a lagged effect of profitability for organizational downsizing on the longer-‐term.

𝑃𝑟𝑜𝑓𝑖𝑡

_!"

= 𝐶𝑜𝑛𝑠𝑡 + 𝛽

_!

𝑂𝐷𝑆

_!"

+ 𝛽

_!!

𝑂𝐷𝑆

_!"^!

+ 𝑥

_!

𝑆𝑖𝑧𝑒

_!"

+ 𝑥

_!

𝐶𝑜𝑛𝑡

_!

+∈

(9)

Munoz and Sanchez (2010) find that the size of the operation is of importance for the impact on profitability. Therefore I also introduce equation 9 where I include the squared term of the variable ODS, to check whether the relationship is non-‐linear. Hypothesis H3c states that there is an optimum in the amount of organizational downsizing. The expectation is an inverted U shape, in such a way that Profit goes up, until a certain amount after which the organization is harmed in such a way that profit decreases again. Beta 11 is thus expected to take a positive value.

5. Deciding on statistical model

The first step to take in deciding which model should be used is a Breusch and Pagan Lagrangian

multiplier test for random effects. This test identifies whether there are random effects present

in the data. The null-‐hypothesis is that there are no random effects present and thus the pooled

least squares model can be used. The alternative hypothesis is that there are random effects

present in the model and thus the pooled least squares model is not to be used. In this case the

fixed effects or the random effects model is appropriate. The Breusch and Pagan Lagrangian

multiplier test (table 3) reports a significant value for all seven models. This means the null-‐

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hypothesis is rejected in all cases and the random effects estimator is the appropriate model.

The difference between the fixed and random effects model lies in the difference in

comparison. The fixed effect model fits when the goal of the study is to compare the outcome with a control group. The emphasize lies on comparing the means of the dependent variable.

The random effect model is suitable when the emphasize lies on the extent to which the random factors influence the variance in the dependent variable. A Hausman test determines which model should be used. With this test, under the null-‐hypothesis that individual variables are not correlated with each other in the model, one can determine the method that should be used. A significant result from a Hausman test indicates a difference between the outcomes of the two different methods. If the null-‐hypothesis is rejected, a fixed effect model is preferred.

Table 3 shows the p-‐values for the Hausman test. For all six models, the p-‐value is significant, so the fixed effect model is selected.

Model Breusch-‐Pagan

(Random/OLS)

P-‐values are reported

Hausman (Random/Fixed) P-‐values are reported

Selected model

Model 1 0,000 (Random) 0,000 (Fixed) Fixed effects

Model 2 0,000 (Random) 0,000 (Fixed) Fixed effects

Model 3 0,000 (Random) 0,000 (Fixed) Fixed effects

Model 4 0,000 (Random) 0,003 (Fixed) Fixed effects

Model 5 0,000 (Random) 0,038 (Fixed) Fixed effects

Model 6 0,000 (Random) 0,034 (Fixed) Fixed effects

Model 7 0,000 (Random) 0,000 (Fixed) Fixed effects

Table 2 Test to decide which model is appropriate

Making profit in a declining market: Which capabilities and strategic actions determine profit growth of newspaper firms in Europe and the US?