# **Introduction**

A great deal of attention has been paid to two trends in the US economy: (1) the emergence of star firms that have pulled away from the rest of the economy (Furman and Orszag [2015], Koller, Goedhart, and Wessels [2017], Autor, Dorn, Katz, Patterson, and Van Reenen [2017]) and (2) the introduction of new technologies together with a fundamental structural change towards a more intangible intensive economy (Corrado and Hulten [2010]) with corresponding implications for corporate investment and the overall economy.<sup>1</sup> However, the two trends are typically analyzed separately, and the rise of star firms has been linked to a decline in market competition. In fact, we have little systematic evidence on the characteristics of these star firms. Is the rise of star firms the result of increasing market power and increasing concentration in the U.S.? What is the role of intangible capital? What is the relation between productivity and returns on invested capital and market value?

In this paper, we use a dataset of publicly listed firms in the United States from the Compustat database to identify star firms<sup>2</sup> and their industries. We examine the role of market power, intangible capital, technological change at the industry level (dependence on routine manual tasks vs high cognitive skills), and productivity in influencing star firm status. We use three measures of market power - a firm-level measure of operating markups, firm-level market share, and a raw measure of firm size.<sup>3</sup> Finally, we examine the persistence of the star firms’ performance and whether they differ in their investment and output per unit of capital compared to other firms in the economy.

Determining whether the performance gap between star firms and other firms is the result of luck, market imperfections, measurement of intangible capital, or a reflection of successful idiosyn-

> 1Several papers have explored the implications of the rise in intangible assets and knowledge capital on corporate investment (e.g. Peters and Taylor [2017], Falato et al. [2013]) and other macroeconomic impacts (e.g. Atkeson and Kehoe [2005], McGrattan and Prescott [2010], Eisfeldt and Papanikolaou [2014] and Caggese and Perez-Orive [2017]).

> 2Following Furman and Orszag [2015], we define star firms as firms in the top 10% of Return on Invested Capital (ROIC), calculated pre-tax, in the US in a particular year. ROIC is an important profitability metric in corporate finance measuring how efficiently a company can allocate its capital to profitable investment and has been widely used in the literature (e.g. Ben-David, Graham, and Harvey [2013]) and by practitioners (e.g. Koller [1994], Koller et al. [2017]). For instance, David Benoit writing for the Wall Street Journal argued that General Motors placated activist investors with the help of higher return on invested capital (ROIC). See _The Hottest Metric in Finance: ROIC_ , Wall Street Journal (2016). However, in a parallel treatment we obtain similar results when we use Tobin’s Q to define star firms.

> 3Our implementation of operating markups, which follows the work of Foster et al. [2008], De Loecker et al. [2018], and Traina [2018] is discussed below.

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