# What is the common way to separate panel sample by firms' profitability?

I have panel data on firms in 3 countries (e.g., 100 firms in 3 countries in 5 years, and event happen at the 3rd year in all countries at the same time). For an example, for each firms I have 4 variables, including:

y x1 x2 profitability

(while y is dependent variable and the rest are independent variables). I am examining the impact of a law on y by using differences-in-differences. There is a theory that suggests that the law has more impact on firms' with high profitability. Therefore, I want to test the impact of laws on a sample of firms with high profitability. However, each firms has 5 profiatbility (given my sample period is 5). So is there any conventional way or widely-used approach to getting a high-profitability subsample in such a case?

There isn't any single way of how to do it. A reasonable way is to calculate average profitability over these 5 periods, ordering firms from most to least profitable and then making the sub-sample from the top 20% or 25% or $$x%$$ depending on what you believe is reasonable.

• This make senses somehow to me, I am wondering if is there any reference to it? Jan 9, 2023 at 17:41
• @PhilNguyen no reference, it is just a reasonable thing to do. Jan 9, 2023 at 17:42