Dispersion of Firm Profitability

The low profitability of Japanese firms is a concern in the economic policy circles. This paper, using a firm-level quarterly survey data during the last decade, presents empirical findings on the cross-sectional dispersion of profit rates among Japanese firms. We pay attention to the difference between the projected and the realized profit rates. The major findings are as follows. First, the dispersion of profit rates tends to be large in recessions when mean profit rates are low. Second, the mean profitability is higher and the dispersion of profit rates is larger for large firms than small firms. From the viewpoint of risk-return trade-off, small firms seems to be more risk averse than large firms. Third, although the dispersion of projected profit rates at the beginning of the fiscal year is relatively small, it becomes larger as quarters passes. At the same time, mean profit rates tend to be revised downward. These results indicate that there is a substantial uncertainty over the projection of profitability at the firm level.