*1.2. Review of Literature on Profitability Determinants*

The determinants that explain profitability can be examined on different levels: the firm-level, industry-level, and country-level, or, for example, on regional or temporal levels. Early research on the topic emphasized the importance of industry structure and a competitive environment on firm performance through the Structure-Conduct-Performance paradigm [18] and the Porter's famous five competitive forces model [19]. Gradually, the focal point of research has shifted from thinking of the industry as an aggregate as the main determinant of profitability towards recognizing individual company characteristics as important profitability drivers [20]. This is also the focus in this research. According to the summary in [21], several variance decomposition analyses across industries, from the 1980s until 2007, reported that firm-specific effects explain from zero to 66% of the variance in firm profitability. In particular, in the manufacturing industry, the firm-level effects explain more variance than they do in other industries [21].

Capon et al.'s (1990) [22] meta-analysis covered results from 320 published studies on financial performance between the years 1921 and 1987 across industries, with different performance measures (see, Table 1). More recent studies [23,24] have found that profitability is positively affected by company size in terms of sales and as the number of employees. Goddard et al.'s (2005) [23] study on European firms implied that the relationship between company size in terms of assets and profitability is negative. They suggest that a rapid expansion of successful firms may have a negative influence on short-term profitability, while at the same time, the positive effect of market/industry concentration implies that costly strategies may be conducted to gain a larger market share.

Adner and Helfat (2003) [25] studied 30 firms in the energy industry and concluded that firm-level effects explain the largest share of variance in profitability. Westerman et al. (2020) [26] studied publicly listed energy firms located in Western Eu-

rope over the period of 2009–2015 and reported that firm size indicated by total assets and EBIT/total sales are positively correlated with return on assets (ROA), especially with renewable firms. They also found a negative relationship between Debt-to-Assets (D/A) and ROA, and that diversification has a negative relationship with firm profitability (ROA) in the energy industry. Jaraite and Kažukauskas (2013) [27] provided evidence that the higher profitability of the electricity production is related to the higher market concentration (a percentage of a market share of the (four) largest firms).

**Table 1.** Selected firm- and industry-specific determinants of profitability summarized from the results of a meta-analysis by Capon et al. (1990). +: significantly more positive than negative relationship, significance level 5%, −: significantly more negative than positive relationship, significance level 5%, Ns: count of positive vs. negative relationships reported not significantly different, significance level 5% [22].


A study by Tsai and Tung (2017) [28] on RE firms from across the world found that the share of renewables in the overall primary energy consumption has a significant and negative effect on the ROA of renewable energy companies. They also found that a nation's energy consumption impacts ROA negatively, whereas employee growth rate has a positive effect on ROA. We observe that companies typically tend to hire more people into profitable businesses. According to [29], the degree of innovation and the development of the technology sector nationally have been found to positively affect the performance of RE firms on the country level. Shah et al. (2018) [30] found mixed evidence on the effect of macro-level shocks on the return on RE investments. In their study, oil prices have had both a positive and a negative effect on the return on RE investments, depending on the level of government subsidies: an increase in oil price boosted the profitability of RE-companies operating in a market-driven regulatory environment.

A study by Hassan (2019) [31] analyzed 420 RE-companies from the OECD countries and reported a significant positive relationship between different RE support mechanisms, including the FIT, and accounting-based measures of financial performance (Earnings per share, Return on Capital Employed = ROCE). Milanés-Montero et al. (2018) [32] specifically analyzed the effect the FIT—which is also of interest in this paper—had on the performance of photovoltaic (solar) farms in Germany, Italy, France, and Spain. They report that the FIT had a positive statistically significant influence on the profitability of the firms when measured in terms of Return on Investment (ROI). The study also confirmed that among the firm-specific determinants, total assets and leverage had a significant positive effect on the photovoltaic firms' performance; the result is contrary to the one from the meta-analysis

of [22]. Neves et al. used the generalized method of moments to study Portuguese energy companies' determinants during the periods of 2010–2014 [33] and 2011–2018 [34].

In summary, the previous literature across industries recognizes the determinants "size in sales" and "size in assets" with both positive and negative effects, and the growth in sales and assets with a positive effect on profitability. Leverage has mostly been found to have a significant negative effect on profitability, with the exception of the above-mentioned study on solar power firms. Liquidity has been found to have a positive effect on firm-level profitability. Furthermore, market concentration has been found to have a significant positive effect in most of the studies and these results are supported by the studies in the RE industry as well. Lastly, the Feed-in-Tariffs have been found to have a significant positive influence on profitability.

For this paper, a panel data analysis is run to investigate the subject from the perspective of unlisted German RE companies.
