The relationship between growth and profit: evidence from firm-level panel data

• The effect of growth on profit is positive, which is consistent with previous empirical research.
• The effect of profit on growth is negative, which is seldom obtained by prior empirical studies.
• The relationship between profit and growth is dependent upon the institutional context in which the economy operates.
• The positive effect of growth on profit is not observed in young firms.
• The moderating role of firm maturity is significant.

This paper examines the firm-level panel data of Korea to identify the relationship between growth and profit. Both static and dynamic panel data regressions are used by applying fixed effects and generalized method of moments (GMM) methods. In addition, non-linear regressions, LAD regressions, and split-sample regressions are employed. The empirical analysis finds that profit affects growth negatively, but growth affects profit positively. The negative effect of profit on growth has not been reported previously. We interpret the result to imply that institutional environment has effects on the relationship between firm growth and profit. Another noteworthy finding is that the effect of growth on profit is found to be positive only in the case of old firms, not in the case of young firms.