Do Profit Rate Differentials Diminish Over Time? A Statistical Analysis of Long-term Financial Data

Keisho Komoto

Introduction

One of the key concepts of economics is that profit rates will tend to equalize across markets in thelong term. This is because if a particular company enjoys a high profit rate， competitors will seek similarprofits by offering the same products or services， stimulating competition and driving down profitrates. On the other hand， if companies are losing money because of poor business results， they will beforced to undergo management system reforms and restructuring， which will boost their profit rates tothe level of other companies.

Looking at the experience of companies mainly in industries that have experienced a surge in demand，we find that profit rates may rise temporarily， but eventually decline to normal in several years. Forexample， around 1990 Aoyama Shoji and other men’s apparel retailers achieved impressive operatingprofits for a very high return on assets exceeding 15%， but this subsequently declined to the averageprofit rate level of approximately 3%.

However， other companies like Toyota， Nintendo， and Taisho Pharmaceutical have consistently maintainedhigh profit rates over the long term. Apparently， companies that constantly develop new products，build strong brands， and nurture marketing prowess gain a competitive edge that cannot be easilyduplicated by others.

Judging from these contrasting cases， there appear to exist forces working both to eliminate differencesin profit rates as well as to perpetuate them.

In this paper， we examine the financial data of over 1，000 companies to determine which of theseopposing forces has the stronger effect on corporate profit rates in the long term.