Compete with Competition: Divergence in the Profitability of Chinese Listed Companies

As one of the largest emerging market economies, the business performance in China has attracted considerable attentions from either professionals or scholars. In order to find out how corporate profitability behaves in an environment like this, we observe the distributional evolution and the intra-distributional mobility of profitability in a cross section of Chinese listed companies. For more transparent and reliable inference, direct variance decomposition and non-parametric approach based on Markov transition matrix are employed. Our results, contradicting to the maintained assumption of competitive convergence, show divergence to the low end along with increased dispersion. And the active intra-distributional mobility of conditional profitability instead leads to a bimodal distribution of two fat tails in the long term. Changes in the business environment of the vibrant economy, producing random shocks, could have overwhelmed the power of competition and thus lead to a deviation from the theoretical prediction. ¶ Judge Business School, University of Cambridge, Trumpington Street, Cambridge CB2 1AG, U.K. Corresponding author. ¥ Judge Business School, University of Cambridge, Trumpington Street, Cambridge CB2 1AG, U.K.