DEGREE OF

The purpose of tMs thesis i s t o determine the answers t o two questions; 1 ) how has the prof i tabi l t ty of corporate manufacturing establishments fared over time, and 2) how has the prof i tabi l i ty of corporate manufacturing fared i n comparison with the prof i tabi l i ty d f the larger aggregate all nonfinancial corporations. To determine the answer to these two questions, r a t e s of return figures (both before and af ter tax) were compiled, using data developed by the Bureau of Economic Analysis, U. S. Department of Commerce, and compared with similar eats of returm figures fo r nonfinancial corporat ions developed i n a study by Holland and Myers, Regression t e s t s were performed on the ra tes of return and several conclusions were reached. The level of business act ivi ty (as expressed by the capacity u t i l ization ra te for corporate manufacturing and the percent change i n r e a l GNP for a l l nonfinancial corporations) was shown t o be a significant determinant of ra tes of return (both before and a f t e r tax). Inflat&on was also found t o have a significant effect, but only on af ter tax ra tes of return, This i s due t o the f a c t tha t inf la t ion affects nominal ( taxible) income, which increases the effect ive t a x rate. Corporate manufacturing a f t e r tax r a t e s of re turn were found t o be twice as sensit ive t o inf la t ion as a f t e r tax r a t e s of re turn t o nonf inancial corporations. (The variable used f o r i n f l a t ion was the percent change i n the Consumer Price Index.) The r e su l t s of how corporate manufacturing has fared with respect t o time i t s e l f ( a f t e r correcting f o r other variables) depend upon what other variables are specified i n the regression model. A model which uses time, inf la t ion, and the capacity u t i l i za t ion i r a t e as explanatory variables shows t h a t time does not have a s ignif icant e f f ec t on corpor a t e manufacturing a f t e r t ax r a t e s of return. Including the Investment Tax Credit as an explanatory variable changes the time coeff ic ient however, and shows a s ignif icant negative e f f ec t of time on corporate manufacturing after t ax r a t e s of return. Conflicting data and s t a t i s t i c s on the Investment Tax Credit, however, lead us t o suspect the . r e su l t s of using it as an explanatory variable; it does not ac t as theory would predict. How it influences before and a f t e r t ax r a t e s of return, and the effect ive t ax rate , i s not ye t f u l l y understood. Thesis Supervisor: Daniel M. Holland, Professor of Finance.