Firm Dynamics: Variation in Profitability Across Canadian Firms of Different Sizes, 2000 to 2009

Abstract

Are small firms more profitable than large firms? This paper uses a longitudinal firm-level dataset to explore the financial performance of firms across size classes, and across industries and provinces during the 2000-to-2009 period. It also examines the volatility of profitability across firm size classes. The results show that the relationship between firm size and profitability follows an inverted u-shaped curve ― profitability rises up to a relatively small firm size class and falls after that threshold has been reached. This relationship prevails across most industries and provinces and over most of the post-2000 period. Furthermore, on an intra-group basis, smaller firms tend to have much more variability in profit rates.