Profit Puzzles or: Public Firm Profits Have Fallen

TL;DR

This paper reveals that public firm profit rates have significantly declined since 1980, while private firm profits have doubled, highlighting potential biases in using public firms as proxies for the entire economy.

Contribution

It demonstrates the divergence in profit trends between public and private firms and emphasizes the impact of selection biases in economic analysis.

Findings

Public firm profit rates fell by half since 1980.

Private firm profit rates doubled since 1980.

Public firm representativeness increased from 30% to 60% of US capital stock.

Abstract

We show that public firm profit rates fell by half since 1980. Inferred as the residual from the rise of US corporate profit rates in aggregate data, private firm profit rates doubled since 1980. Public firm financial returns matched their fall in profit rates, while public firm representativeness increased from 30% to 60% of the US capital stock. These results imply that time-varying selection biases in extrapolating public firms to the aggregate economy can be severe.