Explain relation between the size of firm and performence of the firm in economics
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The aim of this study is to investigate the affect of firm size on profitability. In this study, data of 200 companies
which were active in Istanbul Stock Exchange (ISE) between the years 2008-2011 has been used. “Return on
Assets” (ROA) has been used as indicators of firm profitability and total assets, total sales and number of
employees have been used as indicators of size. Multiple regression and correlation methods have been used in
empirical analyses. The result of analysis indicates a positive relation between size indicators and profitability of
firms. Control variables as the age of the firms and leverage rate have been found in a negative relation with
ROA, but liquidity rate and ROA have been determined to have a positive relation.
Keywords: Firm size, Profitability, Firm Performance, Turkey
1. Introduction
Many researchers in industrial economics, strategic management, marketing and accounting and finance have
attempted to identify the sources of variation of firm-level profitability. The central hypothesis in industrial
economics is that any temporary divergence of a firm’s profit rate from the market average is rapidly corrected
through the effects of potential or actual entry and exit or other competitive forces so that no firm can earn an
above-average profit for a long period of time. (Jonsson, 2007: 46)
Big firms have more competitive power when compared to small firms in fields requiring competition. Since
they have a bigger market share, big firms have the opportunity to profit more. In addition to this, big firms are
able to seize the opportunity to work in the fields which require high capital rates since they have larger
resources, and this situation provides them the opportunity to work in more profitable fields with little
competition (Bayyurt, 2007:582).
When the studies concerning the relation between firm size and profitability are reviewed, mixed results have
been found present. Hall and Weiss (1967), Fiegenbaum and Karnani (1991), Majumdar (1997), Özgülbaş et al.
(2006), Jonsson (2007) Serrasqueiro and Nunes (2008), Lee (2009), Stierwald (2009), Karadeniz and
İskenderoğlu (2011), Saliha and Abdessatar (2011), Akbaş and Karaduman (2012), Shubita and Alsawalhah
(2012) have found a positive relation between firm size and profitability. On the contrary, Shepherd (1972),
Becker et al. (2010), Banchuenvijit (2012) have found a negative relation between firm size and profitability.
Other than above studies, Simon (1962), Whittington (1980), Khatap et al. (2011) have found that firm size does
not have an affect on profitability. These results cause a vague understanding of the affect of firm size on
profitability and also an increase in the interest toward this subject.
The literature review regarding the subject showed that the studies concerning the subject have used total assets,
total sales or number of employees to measure firm size except the ones belonging to Becker et al. (2010),
Serrasqueiro and Nunes (2008). In this study, the aim is to review the affect of three size indicators on
profitability individually and to contribute the literature in this way.
The aim of this study is to investigate the affect of firm size on profitability. In this study, data of 200 companies
which were active in Istanbul Stock Exchange (ISE) between the years 2008-2011 has been used. “Return on
Assets” (ROA) has been used as indicators of firm profitability and total assets, total sales and number of
employees have been used as indicators of size. Additionally, age of the firms, leverage ratio and liquidity ratio
have been used as control variables.
Study consists of five sections. The studies measuring the affect of firm size on profitability have been
summarized in the second section following the introduction. Third section consists of introduction of dependent
and independent variables and explanation of methodology and sampling of the study. Forth section contains the
results of analysis. And a general assessment of the study has been put forth in the last section.
2. Literature Review
The majority of the studies measuring the affect of firm size on profitability have found results with positive
direction between firm
which were active in Istanbul Stock Exchange (ISE) between the years 2008-2011 has been used. “Return on
Assets” (ROA) has been used as indicators of firm profitability and total assets, total sales and number of
employees have been used as indicators of size. Multiple regression and correlation methods have been used in
empirical analyses. The result of analysis indicates a positive relation between size indicators and profitability of
firms. Control variables as the age of the firms and leverage rate have been found in a negative relation with
ROA, but liquidity rate and ROA have been determined to have a positive relation.
Keywords: Firm size, Profitability, Firm Performance, Turkey
1. Introduction
Many researchers in industrial economics, strategic management, marketing and accounting and finance have
attempted to identify the sources of variation of firm-level profitability. The central hypothesis in industrial
economics is that any temporary divergence of a firm’s profit rate from the market average is rapidly corrected
through the effects of potential or actual entry and exit or other competitive forces so that no firm can earn an
above-average profit for a long period of time. (Jonsson, 2007: 46)
Big firms have more competitive power when compared to small firms in fields requiring competition. Since
they have a bigger market share, big firms have the opportunity to profit more. In addition to this, big firms are
able to seize the opportunity to work in the fields which require high capital rates since they have larger
resources, and this situation provides them the opportunity to work in more profitable fields with little
competition (Bayyurt, 2007:582).
When the studies concerning the relation between firm size and profitability are reviewed, mixed results have
been found present. Hall and Weiss (1967), Fiegenbaum and Karnani (1991), Majumdar (1997), Özgülbaş et al.
(2006), Jonsson (2007) Serrasqueiro and Nunes (2008), Lee (2009), Stierwald (2009), Karadeniz and
İskenderoğlu (2011), Saliha and Abdessatar (2011), Akbaş and Karaduman (2012), Shubita and Alsawalhah
(2012) have found a positive relation between firm size and profitability. On the contrary, Shepherd (1972),
Becker et al. (2010), Banchuenvijit (2012) have found a negative relation between firm size and profitability.
Other than above studies, Simon (1962), Whittington (1980), Khatap et al. (2011) have found that firm size does
not have an affect on profitability. These results cause a vague understanding of the affect of firm size on
profitability and also an increase in the interest toward this subject.
The literature review regarding the subject showed that the studies concerning the subject have used total assets,
total sales or number of employees to measure firm size except the ones belonging to Becker et al. (2010),
Serrasqueiro and Nunes (2008). In this study, the aim is to review the affect of three size indicators on
profitability individually and to contribute the literature in this way.
The aim of this study is to investigate the affect of firm size on profitability. In this study, data of 200 companies
which were active in Istanbul Stock Exchange (ISE) between the years 2008-2011 has been used. “Return on
Assets” (ROA) has been used as indicators of firm profitability and total assets, total sales and number of
employees have been used as indicators of size. Additionally, age of the firms, leverage ratio and liquidity ratio
have been used as control variables.
Study consists of five sections. The studies measuring the affect of firm size on profitability have been
summarized in the second section following the introduction. Third section consists of introduction of dependent
and independent variables and explanation of methodology and sampling of the study. Forth section contains the
results of analysis. And a general assessment of the study has been put forth in the last section.
2. Literature Review
The majority of the studies measuring the affect of firm size on profitability have found results with positive
direction between firm
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