Here is a chart that I find quite interesting. To make this graph, I ranked the top 4000 Compustat firms by market capitalization. I then "binned" this list into groups of 20 and calculated the average market cap and

markup for each group. Note that the

markup is a weighted average (total profit for all 20 firms divided by total sales). This helps to get rid of some outliers, as a few firms post incredibly large losses relative to sales.

The result is quite startling. Two trends are notable. First, higher capitalization corresponds with higher

markup. Second, if we interpret the range of the

markup for a given capitalization as the level of risk, higher capitalization functions to limit risk.

- Markup vs Capitalization.png (141.59 KiB) Viewed 3789 times