This summer, we published an analysis showing that the gap between large and small firms has grown over the past 15 years, with large companies becoming more likely to maintain their dominance and small ones less likely to become big and profitable. Several readers wrote to us asking about what’s happened to medium-sized firms — those not included in the top 30% or the bottom 30% of firms as measured by market value but those in the middle 40%.

Xổ số miền nam hàng ngàyWhen we look at the Center for Research in Security Prices (CRSP) and Compustat data, obtained from Wharton Research Data Services, we find that the number of medium firms has declined from 3,270 in 1996 to 1,884 in 2017, mimicking the pattern of the . Our analysis shows that a medium public firm is much bigger (in terms of market value) and older (measured from the year of listing) today than it was in 1981, but despite this, it is more likely to be reporting losses and spending more on innovation. In our view, this trend depicts the enigmatic character of today’s medium corporations: they are growing, but struggling to earn profits, arguably because of increasing technology-based competition. They must keep investing and innovating in order to survive another day.

In figure 1, you can see that there’s been a dramatic increase in the average market value of medium firms, from 1981 to 2017, measured in millions of dollars and inflation-adjusted to 1981 values. (We find the same pattern with total assets and sales revenues.) The only blip in this growth pattern occurs during the financial crisis of 2007-2008.


A medium firm today is approximately four times bigger and has been around for 7.6 years longer, on average, than a medium firm in 1999. In the same period, however, we’ve also seen a decline in the number of medium firms, due to the large-scale delisting of precarious companies, first during the dotcom bust of the early 2000s and then during the great recession of 2007-2008. In addition, (IPOs) has dwindled since the 1990s, reducing the supply of small firms that potentially grow to become medium firms. The decrease in the number of medium firms, coupled with the increase in their aggregate market capitalization from $434 billion in 1996 to $2,083 billion in 2017, means that average firm size quadrupled, despite adjusting for inflation.

Our data also show that the gross margins of medium firms steadily rose from the late 1990s to 2017. At the same time, these companies showed a steady decline in sales growth, the median value of which fell from 12% in the late 1990s to 4-5% in 2017. It seems that medium firms now pursue less aggressive growth strategies than they did in the late 1990s, and this could indicate a growing maturity of firms’ business models. (In their incipient lifecycle stages, firms pursue rapid growth at the cost of profits, but slow down their growth in the mature lifecycle stages to shift focus to earning profits. Recall Elon Musk’s that Tesla could become profitable if it slows down growth.)

Medium firms’ cash balances, measured as a percentage of total assets, have also increased from 6.8% in the late 1990s to 9.7% now, a 43% increase. And the number of delistings due to bankruptcy and liquidations have declined from about 200 per year in the late 1990s to less than 90 per year in 2017. These pieces of evidence are consistent with the idea that medium firms have stabilized their business models and shifted their focus away from growth and on to profits. This would suggest positive news: investors can now hope to earn steady dividends, and managers can focus on maintaining their businesses instead of experimenting with them.

Yet another set of signs suggests that the medium firms are increasingly unstable and struggling to make profits, however. If you look at Figure 2, the data show that now almost 35% of these companies report losses – an accounting anomaly, considering we found that margins have increased. The percentage of losses was higher only during the dotcom bust and great recession years. But in 2017 almost a third of medium firms were failing to meet their expenses despite the booming economy. And their median return on assets declined from 196 basis points (one hundredth of percentage) in the late 1990s to 115 basis points now, a drop of 41%.


So what’s happening with these medium-sized firms? Are they enjoying the quiet life now or are they more unstable than ever?

We took a closer look at the accounting to see if that would illuminate what was going on. We examined firms’ average expenditures on intangibles, such as research and development (R&D) and selling, general, and administrative (SG&A) expenses, like marketing and customer acquisition. We find that the average expenditures on R&D and SG&A as a percentage of firms’ total expenses has dramatically increased over time. This suggests that medium firms are shifting away from producing commoditized physical products to offering innovative products and value-added services. This makes sense if you think about the rise in knowledge- and IT-based companies. When firms move away from physical inputs (land, factories, energy, labor) and toward intangible investments, the gross margins might improve but the net profits could decline – all because of how the accounting for these investments works.


The accounting makes it so that the principal investments for a knowledge company are immediately expensed as operating costs (they reduce net profits but don’t affect gross margins), whereas the principal investments for a growing physical product company are capitalizedXổ số miền nam hàng ngày (they are reported as assets). For example, Twitter reported a net loss for the 2017 fiscal year despite achieving . In contrast, for fiscal year 2018, and reported positive net profits despite reporting gross margins of only 25% and 18%, respectively. Of course, we do not claim that all medium firms are knowledge companies, but this discrepancy between gross margins and losses would increase as medium firms increase their investments on intangibles and innovations — higher gross margins on one hand but higher losses on the other.

Aside from this accounting anomaly, greater competition may also be working to increase medium firms’ instability. The pace of technological advancement today also means that continual improvement is more important than ever. Medium companies have no choice but to keep enhancing their investments in knowledge and innovation if they are to survive another day.

In sum, the data show that today’s medium firms are larger and older than at any other time in the past 35 years; yet, an increasing percentage of medium firms incur losses, have lower profits, and have lower growth despite spending larger amounts on experimentation and innovation. These findings have several implications. First, despite their larger size, medium firms appear to be struggling and must constantly reinvent themselves in order to survive. Second, the role of experimentation, normally associated with smaller startups, must increasingly be taken up by medium-sized, middle-aged firms. Their business leaders must increasingly manage like they’re steering a startup, with relentless innovation, just to keep their heads above the water. There’s little hope now for living the quiet life of a maturing firm.