What Explains Widening Profitability Dispersion Around the World?

This study documents the profitability dispersion-widening phenomenon in eleven countries over the period 1982–2007. The macro profitability dispersion level and its time-series behavior vary across years and countries. We investigate fundamental factors that generate the variability in profitability. Using market-wide aggregated data, we report evidence that cross-sectional risk of profitability is significantly related to income smoothing, the amount of risk money supplied, dynamics in capital markets, the presence of small firms, and macroeconomic productivity. Both accounting and nonaccounting factors play important roles in explaining the dispersion. We further find that nonaccounting factors tend to play the dominant role in explaining dispersion. Our results are robust to alternative definitions of dispersion, accounting factors, and to varying model specifications. Our findings contribute to the literature on the property of accounting numbers and the risk, and have implications for understanding our economy from a macro perspective.