The Rise of (Mega-)Firms with Negative Net Earnings

We document the prevalence of public companies with negative net earnings since the 1970s. The fraction of firms with negative net income has increased sharply from 18% in 1970 to 54% in 2019. Such an increase is mainly driven by the right shifts in the mean, i.e., the increasing popularity of sizable firms that are not profitable. Based on the existing literature on customer capital, we conjecture that the increasing returns-to-scale in the new economy is the main driver behind it. We provide three pieces of supporting evidence. First, earning losses mostly come from the growing customer capital expenses instead of production-related costs, capital investments, or R&D expenditures. Second, cross-sectionally, firms with higher markup tend to have lower net incomes. Third, industries with low marginal production costs, on average, have higher percentages of unprofitable companies