Firm Size and Profit Rate Differential

Abstract

Most economic theories have assumed the equalization of profit rate through competition among companies with different sizes (e.g. Marx "Capital" Vol. 3). In recent years, relationship between firm size and profit rate measured using large scale micro data such as financial statements of individual companies (Dhawan 2001, Shaikh 2016, chapter 7). According to their results, the profit rate declines with firm size. Shaikh (2016) derived the negative elasticity of the profit rate on the asset size from consolidated settlement data of listed companies in the United States in 1976-2009 (about 40000 samples). He explained this result by the aggressive price-cutting behavior in large companies. I measured relationship between firm size and profit rate using consolidated settlement data of listed companies in Japan in 1992-2001 (about 10,000 samples). The results are as follows: on a scatter diagram with the vertical axis as the profit ratio (ROA) and the horizontal axis as the total asset amount, distribution pattern is arrow-shaped. That is, the average profit rate in each asset class is almost similar, and the variation of profit rate declines with firm size. However, in the similar manner to Shaikh (2016), if we exclude deficit companies from samples and define profit rate as operating income / tangible fixed assets, the profit rate declines with firm size. The above-mentioned arrow-shaped distribution can also be explained by the theory of firm aiming for growth under the constraints of Finance frontier and Opportunity frontier (Wood 1975).

Hiroyuki Uni

Professor

Graduate School of Economics, Kyoto University

Yoshidahonmachi, Sakyo-ku, Kyoto, 606-8501 JAPAN

E-mail: uni@econ.kyoto-u.ac.jp

TEL: +81-75-753-3444