What lies beneath the averages? Unveiling firm earnings through quantile regression

Abstract

This paper explores the relationships between firm earnings and firm characteristics: firm size, financial leverage, and R&D expenditures, using quantile regression (QR). While previous studies utilized linear regression methods such as OLS and LAD, quantile regression gives a more comprehensive view and is able to explain different relationships in the profitability distribution.

The dataset includes S&P firms from 1996 to 2023, a broader scope compared to earlier study by Li & Hwang (2011), which analyzed data from 1996 to 2005. The extended time frame and larger dataset allows deeper insights into the nature of these relationships with better comparisons. Profitability is analyzed using return on equity (ROE), firm size as total assets, financial leverage through the debt ratio, and R&D expenditures per employee. Updated robustness checks, such as control variables, alternative measures, and quantile moments with bootstrapping, were also included to enhance the results reliability.

The findings reveal significant variations of how firm size, leverage, and R&D expenditures affect profitability across quantiles, approving that it is important to go beyond the average effects, and QR is able to capture these. Smaller firms may benefit from upscaling their operations from the positive relationships, while larger firms may exhibit inefficiencies when reaching certain limits. Financial leverage negatively affects less profitable firms but benefits higher profitable ones. R&D expenditures also show different effects as only the highest profitable firms are able to obtain the R&D benefits.

This study contributes to the literature by addressing the mixed findings and providing the updated empirical evidence using more recent data and a more suitable model. QR allows for a richer analysis of heterogeneous effects, while the new robustness checks increased the validity of the findings. The paper highlights the importance of tailoring strategic decisions to the conditions of the companies.