Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.

),
Accounting Dept., MSc Accounting and Auditing

R&D investments and firm performance: An

Empirical Investigation of the High Technology
Sector (Software and Hardware) in the E.U.
E. Pantagakisa, D. Terzakisb, S. Arvanitisc
Abstract
Purpose The purpose of this paper is to examine the relationship among
research and development expenses (R&D), market value and firm
performance. Additionally, what is also questioned is, whether the relationship
between R&D and market value of the firm is linear.
Design/methodology/approach Data analysis was realized through panel
data analysis and the feasible generalized square method (FGLS), using data
from the financial statements of 39 European firms, which activate in the
Software and Hardware Computer sector, for the period 2006-2010. Following
prior studies, our dependent variables are the Market Value and Annual
Return on Assets (ROA).
Findings Results indicate a positive correlation between R&D investment
and firm performance in the marketplace. In contrast, the above does not
apply in the case of R&D and firm performance, since due to time lag, the
relationship with the ROA results in being negative. Furthermore, a non-linear
relationship between R&D and market value of the firm is verified.
Research limitations/implications There are limitations because many
firms either they do not accurately calculate or they do not record their R&D
investments in their financial statements.
Originality/value The verification of the existence of a non-linear
relationship between R&D investments and market value of firms, adds an
innovative character in this research.
Keywords Research and development (R&D), firm performance, market
value, nonlinear, time-lag.
JEL classification M40, O30, O32
a

Correspondence Author: T.E.I. of Crete, S.M.E., Dept. of Accounting, MSc Accounting and Auditing,
postgraduate student. Estavromenos, 71500 Heraklion, Crete, Hellas tel. +30 2810 379612. Email:
pantagakis@gmail.com(E.K. Pantagakis)
b
T.E.I. of Crete, S.M.E., Tourist Dept. & MSc Accounting and Auditing. Estavromenos, 71500
Heraklion, Crete, Hellas, tel. +30 2810 379600. Email: dterzaki@staff.teicrete.gr
c
T.E.I. of Crete, S.M.E., Dept. of Accounting, MSc Accounting and Auditing. Estavromenos, 71500
Heraklion, Crete, Hellas, tel. +30 2810 379674. Email: starvan@staff.teicrete.gr

Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

1. Introduction
Nowadays, technological progress is made at an accelerated pace by companies all
over the world in order to improve their position in market, as regards their efficiency

and competitiveness. Firms in order to gain competitive advantage engage in costly

research and development (R&D) activities to develop innovations (Thatcher and
Pingry, 2009). Research and development has been playing a critical role in firms
productivity, growth and long-run performance (Long and Ravenscraft, 1993; Vivero,
2002).
Empirical studies have shown mixed or even conflicting results. Prior studies
have found that R&D expenditures are positively correlated with firm performance
(Branch, 1974; Tassey, 1983; Erickson and Jacobson, 1992; Long and Ravenscraft,
1993; Hitt et al. 1995). It is also widely adopted that investments in research and
development contribute significantly to sales, productivity and firms profits
(Griliches, 1988; Romer, 1990; Geroski, Machin and Van Reenen, 1993; Jones, 1995;
Van Reenen, 1997). Furthermore, several studies have concluded a positive
relationship between R&D investments and market value of the firm (Chan et al.
1990; Doukas and Switzer, 1992; Chauvin and Hirschey, 1993; Szewczyk et al. 1996;
Bae and Noh, 2001; Ho et al. 2005; Bae et al. 2008).
However, some researchers have different empirical results. According to Gou et
al. (2004) and Lin and Chen (2005), the R&D intensity has a significant negative
impact on both firms profitability and productivity. It is worth mentioning that
several studies have shown that is required an adjustment period until R&D
investments reduce the production cost and generates profits (Branch, 1974;
Ravenscraft and Scherer, 1982; Hirschey and Weygandt, 1985; Jefferson et al. 2006;
Ding et al. 2007; Coad and Rao, 2008). Therefore, the results many times are not
apparent in the year of investment, as firm performance tends to increase with time
lag.

Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

Regarding the relationship between R&D investments and firm performance,

mainly prior empirical studies have shown a linear impact. Researchers may have
ignored several important factors, since if we assume that the relationship is linearly
positive it implies that R&D investments will persistently yield profits to the firm. On the
other hand, when the above relationship is linearly negative it implies that R&D
investments will constantly cause loss to the firm. This can be considered as nonrational (e.g., Huang and Liu, 2005), because an increase in R&D investments may
generate profits, but it also will increase the firms total R&D cost (Shy, 1995), and
secondly, it is impossible for a company to undertake investments in R&D endlessly,
due to the limitations of management capabilities (Penrose and Pitelis, 2009).
We used data from 39 publicly traded high technology companies (hardware and
software) of Eurozone countries for the period 2006-2010. For data processing, used
panel data analysis (panel data analysis) and evaluated models performance of
business (random and fixed effects) with the methods of least squares and generalized
method of least squares, as well with the feasible generalized least squares (FGLS).
The results show a positive correlation between R&D investments and market value
of the firm while the same is not verified for R&D and firm performance, since there
is negative correlation with ROA, due to time lag. Finally, is verified the non-linear
relationship between R&D and market value of the firms.
This paper is organized as follows: The next section briefly reviews some
theoretical background and proposes our research propositions. Section 3 introduces
the data and presents our methodology. Section 4 presents the empirical results. In the
final section, we discuss the findings and limitations.

Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

2 Literature Review
Investment in R&D is actually an investment in intangible assets that contributes
to the long-term growth of the firm. Firms invest in research and development in
order to enhance their competitiveness and the ability to increase their profits.
Furthermore, spending on research and development can lead to a reduction in
production costs and increase the added value of the firm (Mansfield, 1996).
Correlation and multiple regression analysis have customarily been used to examine
R&D contributions (Connolly and Hirschey, 2005; Huang and Liu, 2005)
Branch (1974), assuming a time lag of four years from the introduction of an
innovation to the registration as industrial property, concluded that the trend of R&D
investments affect positively both the future profits and increase in sales. Used as
basic variables R&D intensity (R&D / sales), profits (earnings after interest and taxes
divided by total assets), growth of sales and the number of patents. It is also important
to mention that the effect on sales growth may be sooner than the increase in profits.
Grabowski and Mueller (1978), showed that R&D investments in companies,
belonging to intense research activity sectors, have high efficiency. Moreover,
concluded that the variability in future profitability of these firms is limited to half
when investments in R&D is capitalized (as assets) rather than calculated as an
expense in the income statement.
Tassey (1983), using the capitalization of R&D as an indicator to calculate the
research activity investigated the effect in various efficiency ratios such as
profitability, sales and Return on Equity (ROE). He concluded that companies which
are operating in high tech industries, their research activity attributes significantly.
Also, Hall and Hayashi (1989), concluded that investing in research and development
is a very important intangible asset, which can lead to higher profits, in greater
duration of time.

Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

Sougiannis (1994), studied the behavior of profits and stock value in relation
with investments in R&D. The conclusion was that in a 7-year period an increase of
one dollar on research and development expenditures has positive impact on both
profits and market capitalization of the firm, by increasing two dollars the profits and
five dollars the stock value.
Harmantzis et al. (2005), concluded that the market value of the firm and sales
have significant positive relationship with R&D. In addition, researchers found a
positive correlation between cash and R&D expenditures. Ding et al. (2007), verified
that investments in R&D affect both profits of the same and of future period.
Moreover, Ehie and Olibe (2010), examined the relationship between investments in
research and development (R&D) and market value of U.S.A. firms over an
18-period. The researchers concluded that R&D investments affect positively firm
performance, and more specifically the market value. Furthermore, researchers
concluded in a non-linear relationship between R&D and market value. Finally, Zhijie
Lin et al. (2011), found that investments in R&D have a greater impact to the
financial performance of companies, which are activated in the construction of
computer Software in relation with the Hardware companies.
According to the above we posit the following two hypotheses:
Hypothesis 1: Investment in research and development affect positively the

market value of the firm.

Hypothesis 2: Investment in research and development affect positively the firm

performance.
According to previous studies, if the relationship between R&D investments and
firm performance is linearly positive, it implies that investment in R&D will
persistently yield profits to the firm. However, because of the limitations that exist in
management capabilities in every company (Penrose and Pitel, 2009), and because
innovations from R&D may be easily duplicated by competitors (Huang and Liu,
2005), we doubt the case that R&D investments can definitely create sustainable
competitive advantage and yield profits endlessly. On the other hand, if the
5

Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

relationship between R&D investments and firm performance is linearly negative, it

implies that R&D investments will constantly cause loss to the firms.
Firstly investments in R&D will be charged at great cost the firm making them.
An increase in R&D can bring profits, but simultaneously will increase the overall
cost of the enterprise in R&D (Shy, 1995). Therefore, firm performance cannot be
considered that it is depended linearly with R&D investments. Secondly, based on the
theory of the growth of a firm, it is impossible for a company to undertake itself
endlessly investments in R&D due to the limitations of management capabilities
(Penrose and Pitelis 2009).
Based on above arguments, investments in R&D, in the early stages may have a
positive impact on firm performance. However, after reaching the optimal point, the
continued investments in R&D will eventually lead to a negative correlation between
R&D investments and firm performance.
The third research hypothesis is formulated as follows:
Hypothesis 3: There is a non-linear relationship between investments in research
and development and the market value of the firm.
3 Data and Methodology
The data were drawn from database Thomson-One (thomsonone.com). The
sample is consisted with companies which publish in their financial statements
investments in research and development (R&D) for the period 2006-2010, and
belong to the subsectors of Computer Software and Hardware. In addition, firms
belong to 17 countries, members of the Eurozone, and are publicly traded. The
companies which publish to their financial statements R&D expenditures are 73 and
amounted to 46.5% of all companies. Our final sample is consisted of 39 companies,
since in order to to have a strongly balanced data set we had to exclude companies
that they have not available data for all years.

Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

Based on the previous literature review, this study has two major themes: (1) to
explore the relationship between R&D investments and financial performance; (2) to
explore the relationship between R&D investments and market performance.
The conceptual framework of this study is shown in Figure 1:
Figure 1: The conceptual framework of this study
Financial
performance
R&D investments

Firm performance
Market performance

Control variables
Firm characteristics

The main variable of our study is the intensity of firms in R&D, which is
calculated as the ratio of R&D expenditures to total net sales of the company. Several
researchers have argued the need to capitalize R&D, since it represents an intangible
asset of the company. However, because there is an inability to determine a
depreciation rate (Hirschey and Weygandt, 1985; Ho et al. 2005), we use the
expenditure on R&D to net sales instead of capitalized R&D. Many previous studies
have attempted to investigate the linear relationship between R&D investments and
firm performance, which usually adopted the R&D intensity (e.g., Erickson and
Jacobson, 1992; Finkelstein and Boyd, 1998; Henderson and Fredrickson, 2001).
As dependent variables used for firms performance the annual return on asset
(ROA), while for the market value of the company we use the MARKET
CAPITALIZATION. The market value of the firm equals to the closing price by the
number of shares outstanding to total sales of the company and reflects the market
perception of the firm value. According to Aboody et al. (1999), the market price,
sums up not only investors' assessments of the value of firm assets, but also the
7

Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

outcomes of investment decisions. Also, performance measures based on the market

are used to estimate the return of R&D investments by Chauvin and Hirschey (1993)
and Bae et al. (2008). On the other hand, ROA, is a measure of accounting firm
performance and has been widely adopted by many studies (e.g., Gedajlovic and
Shapiro, 1998; Anderson et al. 2000; Tosi et al. 2000; Henderson and Fredrickson,
2001; Coombs and Gilley, 2005; Hogan and Lewis, 2005; Kato et al. 2005).
The firm's performance can be influenced by many other factors except R&D.
Thus, we used as control variables, firm size, capital structure, and growth of sales.
Firm size is calculated by the natural logarithm of total assets (Finkelstein and Boyd,
1998). Leverage is defined as the ratio of total liabilities to total assets and the growth
of sales, as the current period's sales minus last year sales to sales of the previous
period.
In the empirical verification or not of the above assumptions, we estimate the
following models.
(

MARKETCAP=

MARKETCAP=
ROA =

(
)

)
(

(
(

(1)

(2)

(3)

The test to add time dummies to the models showed that is required as p <0.05.
In addition, tests for autocorrelation of residues (Pesaran's test and Wooldridge test) at
contemporaneous correlation and correlation in panel data show that in both cases
there is autocorrelation problem. Also, test for heteroscedasticity (Modified Wald test)
showed that there is serious problem in all three models (p <0.05). Finally, there is no
multicollinearity problem since the average Variance Inflation Factor (VIF) ranged
from 1.06 to 4.27. A VIF value greater than 10 is an indication for multicollinearity
problems.

Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

It is worth mentioning that all the models of our study have been estimated with
random and fixed effects. For selecting the most appropriate model for interpretation,
Hausman test shows that these are the fixed effects except the third, which was
chosen for interpretation that of random effects (p>0.05). Because of the serious
heteroscedasticity and autocorrelation problems in our data in the estimation of
models we cannot accept any of them for the interpretation of estimates that obtained.
For this reason, we will move into the methodology of panel data analysis, but
we will estimate the models by using the method of feasible generalized least squares
(FGLS), which assumes the existence of heteroscedasticity and autocorrelation in our
data. In particular, the analysis of panel data models will be estimated with the
feasible generalized least squares method, which besides the existence of
heteroscedasticity assumes common first-degree autocorrelation (AR1) between the
panels.
4 Empirical Results
Tables 1 and 2 present the descriptive statistics and Pearson correlation of the
variables used in our models. The data show that the average value of firms
MARKETCAP is about 1.7, while the average R&D intensity is about 0.17. This
means that on average our sample firms invest in research and development
approximately 17% of their revenues. The average annual return on assets is 0.062
and the average annual sales growth is amounted to 8.3%. Finally, the average
percentage of total liabilities to total assets is 0.42 and the natural logarithm of firm
size is 4.18.

Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

Table 1: Descriptive Statistics

Variables
MARKCAP

overall
between
within
R&D
overall
between
within
2
(R&D)
overall
between
within
ROA
overall
between
within
SIZE
overall
between
within
LEVERAGE overall
between
within
GROWTH
overall
between
within

Mean
1,686

0,167

0,038

0,062

4,179

0,420

0,083

Std. Dev.
1,324
1,085
0,776
0,102
0,100
0,025
0,054
0,054
0,012
0,106
0,077
0,073
1,597
1,606
0,153
0,164
0,154
0,063
0,158
0,073
0,141

Min
0,219
0,315
-0,924
0,004
0,007
0,071
0,000
0,000
-0,015
-0,275
-0,156
-0,188
1,411
1,730
3,712
0,042
0,058
0,254
-0,384
-0,049
-0,316

Max
8,071
4,185
5,589
0,595
0,567
0,258
0,354
0,322
0,104
0,470
0,243
0,378
9,431
9,289
4,608
0,832
0,734
0,690
0,599
0,255
0,592

Observations
N = 195
n = 39
T=
5
N = 195
n = 39
T=
5
N = 195
n = 39
T=
5
N = 195
n = 39
T=
5
N = 195
n = 39
T=
5
N = 195
n = 39
T=
5
N = 195
n = 39
T=
5

The correlation coefficients show that there is not very strong correlation
between the independent variables, and will not address multicollinearity problems in
the estimation of models with the method of combined cross sectional and
longitudinal analysis. The only variables which showing significant correlation, are
the variables R&D and (R&D)2.

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Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

Table 2: Pearson Correlation

MARKCAP

RD

(RD) 2

ROA

SIZE LEVERAGE GROWTH

MARKCAP

1.0000

RD

0.4292

1.0000

(RD) 2

0.3533

0.9242

ROA

0.3400

-0.0848 -0.0398 1.0000

SIZE

0.1272

-0.1621 -0.0570

LEVERAGE

-0.3017

-0.2495

-0.2089 -0.3335

0.0990

1.0000

GROWTH

0.2375

0.1272

0.1630

0.0828

-0.0679

1.0000

0.3132 1.0000

0.2373

1.0000

Table 3 presents the empirical results of our models with dependent variables
MARKETCAP and ROA. Model 1, includes R&D intensity and market value of the
firm, show that R&D intensity does positively affect the market value of the firm.
Also firm size is positively correlated with market value, while the leverage has a
negative impact. It is worth mentioning that we observe a strong negative relationship
between time dummies and market value of the firm (MARKETCAP). The dummy
for 2006 is omitted, so that the effect of time on the value of the firm is with reference
year 2006.
Specifically, with reference year 2006, we observe a continuous decline in the
market value of the firm with more intense the years 2008 and 2009 (p = -10.95 and
p = -5.86 respectively, start of economic crisis in the Eurozone) and progressive
retreat in 2010 (p = -4.12). In other words, the market value of high tech firms
(software & hardware) in the Eurozone has declined in relation with the reference
year 2006, 1.04% in 2008, 0.63% in 2009 and 0.47% in 2010.

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Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

Table 3: Panel data analysis FGLS estimator

RD

Model 1
MARKET
CAPITALIZATION
FGLS Hetero.
Common AR(1)
4.264***

(R&D)2

Model 2
MARKET
CAPITALIZATION
FGLS Hetero.
Common AR(1)
9.996***

Model 3
ROA
FGLS Hetero.
Common AR(1)
-0.267***

-12.19**
(-2.59)

SIZE

0.241***
(4.49)

0.292***
(6.07)

0.0188***
(8.17)

LEVERAGE

-1.932***
(-5.88)

-1.952***
(-6.25)

-0.215***
(-7.56)

2007.YEAR

-0.305***
(-4.21)

-0.324***
(-4.32)

2008.YEAR

-1.039***
(-10.95)

-1.044***
(-10.88)

2009.YEAR

-0.625***
(-5.86)

-0.640***
(-6.04)

2010.YEAR

-0.468***
(-4.12)

-0.481***
(-4.32)
0.112***
(5.62)

GROWTH

_CONS
N

1.113***
(3.31)
195

0.434
(1.28)
195

0.100***
(4.82)
195

t statistics in parentheses * p < 0.05, ** p < 0.01, *** p < 0.001, a p < 0.1

This study further adds the squared term of R&D intensity in Model 2, which
shows that R&D investments have a significantly positive correlation with market
value of firm, while the squared term of R&D investments has a negative correlation
to market value. Hence, there is an inverted U-shaped non-linear relationship between
R&D investments and market value. As in the first model firm size is positively
correlated with market value, while the leverage has a negative impact.

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Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
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On the other hand, the results of model 3, which has as dependent variable the
annual return on assets (ROA), show that R&D intensity does negatively affect ROA.
Because of the high degree of uncertainty, R&D investments do not necessarily create
profits in a current year. Regarding the control variables, size and growth of sales are
positively correlated with the annual return on assets, while leverage has a negative
impact.
If differentiating the non-linear part of the second model, we gain an optimum
R&D intensity level of 41%4. This indicates that when firms spend about 41% of their
revenues as R&D expenditures, the firm's market value will reach the optimum level.
In other words, R&D investments make a positive contribution to market value of the
firm at the beginning. However, when R&D investments reach an optimum level,
market performance will decline following continuous R&D spending.
It is a high percentage, but is influenced by the fact that our sample is consisted
by firms which are with high intensity in R&D. Also, the above rate is verified by the
descriptive statistics of the data, and specifically with the average (0.17) and
maximum (0.6) value of R&D intensity. This result is consistent with the prior
literatures argument that a high degree of R&D investments does not necessarily
result in higher firm performance. Figure 2 shows the non-linear relationship between
R&D intensity and market value.

The optimal point implies the point where the marginal costs of R&D intensity become equal to their
marginal benefits. Differentiating the R&D intensity of Model 6, we have the following results:
marketcap/rd=0
9.996rd-12.19

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Accounting Dept., MSc Accounting and Auditing

Figure 2: The relationship between R&D intensity and MARKETCAP

3

MARKETCAP

41%

2,5

1,5

0,5

RD intensity

0
0

0,1

0,2

0,3

0,4

0,5

0,6

0,7

0,8

5 Conclusions
In our study we undertook an empirical investigation using panel data
methodology for 39 Computer Software and Hardware firms of the Eurozone for the
period 2006-2010. This study confirms the positive impact of R&D in market value
for the 39 companies forming our sample (Chan et al. 1990; Doukas and Switzer,
1992; Chauvin and Hirschey, 1993; Bae and Noh, 2001; Ho et al. 2005; Bae et al.
2008; Ehie and Olibe, 2010). Moreover, we conclude that the relationship between
investments in research and development and the market value of the firm is nonlinear. Hence, investments in R&D will have positive effect on the market value of
the firm until the optimum point.
In our research we showed that when firms invest 41% of their revenues in R&D,
then the company's market value is maximized and reaches the optimum point. After
this optimum point, the relationship between R&D and market value of the firm is
negative. In a similar research of Cheng-Jen Huang and Shu-Yun Chen (2010), have

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Technological Educational Institute (T.E.I.) of Crete, School of Management and Economics (S.M.E.),
Accounting Dept., MSc Accounting and Auditing

found that firms can reach the optimum ratio of ROA and of Tobin's q5 ratio when
they spend about 20% and 13% of their revenues in R&D respectively. As regards the
control variables in our research are statistically significant. More specifically, the
firm size and the growth of sales are positive related to dependent variables, while the
leverage is related negative.
In contrast is no verified the positive impact between research and development
expenditures and firm performance, and more specifically with the annual return on
assets of the same year. Several studies observe time lag between the impact of R&D
and firm performance (Branch, 1974; Ravenscraft and Scherer, 1982; Hirschey and
Weygant, 1985; Cockburn and Griliches, 1988; Lev and Sougiannis, 1996; Lev and
Aboody, 2001; Ding et al. 2007; Coad and Rao, 2008).
The production costs tend to increase in the short run, because new product
development need time to show results, since the innovation of the methods
introduced into the production processes creates commotion during the adjustment
period. The firms need time to assimilate the changes and reduce production costs in
order to increase firm performance, since the innovation of the methods introduced to
production processes requires a learning period. That explains the negative relation of
R&D to firm performance of the investment year. Therefore, firms need to have
consistency in investments in research and development because many times the
results are not apparent in the year of investment.
Although we have results in accordance to the theory, further research should be

done to investments in research and development and the time lag which is required to
have a positive effect on firm performance would be particularly important. Finally, it
is important to further research in the future, because many firms do not accurately
calculate their investments in R&D in their financial statements. Several managers
calculate investments in research and development as an expense and do not capitalize
in order to raise or lower firms profits (Lev, 2003).

Tobin's q ratio is defined as the quotient of the sum of market value and total liabilities of the business
(debt), to total assets (Chung and Pruitt, 1994).

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Accounting Dept., MSc Accounting and Auditing

6 Limitations
While this research has found some new findings, we acknowledge some
limitations. First, the non-recording of research and development expenses in the
financial statements of companies limited our sample from 157 to 73 companies. In
addition, several companies had no data on our variables for the period 2006-2010,
with result our sample be limited even further. This limitation of our sample may have
affected the results of the study. Furthermore there is difficulty on modeling such a
research because many of the R&D expenditures are calculated in the income
statements as production costs and not specifically as an R&D figure. This is due to
the fact that many companies do not accurately calculate their R&D investments in
their financial statements in order to raise or lower their profits.

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