Does Size Matter in Firm Performance? Evidence from US Public Firms

Abstract

This paper reexamines the determinants of firm performance and, in particular, the role that firm size plays in profitability. A fixed-effects dynamic panel data model for over 7,000 US publicly-held firms during the period 1987-2006 provides evidence that profit rates are positively correlated with firm size in a non-linear manner, holding an array of firm- and industry-specific characteristics constant. In addition, industry-specific fixed effects play a negligible role in the presence of firm-specific fixed effects.Profit Rates, Panel Data, Firm Size, Industry Effects, Firm Effects,

Testing relationships between firm size and perceptions of growth and profitability: An investigation into the practices of Australian ICT SMEs

“…This however is not reflected by empirical literature, providing ample evidence for a positive sizeprofitability relationship (Lee, 2009;Mukhopadhyay & AmirKhalkhali, 2010;Pervan & Višic, 2012;Babalola, 2013). This allows the establishment of the third hypothesis tested in this study: Details of the data collection and analysis are discussed in the following section of the paper.…”

“…The positive relationship between past profitability and firm size (as per the result of testing Hypothesis 3) corresponds with the work of Greve (2008), Lee (2009), Mukhopadhyay and AmirKhalkhali (2010), Pervan and Višic (2012) and Babalola (2013) and can be explained by RBV as a conceptual basis.…”

“…Thus, Gibrat's Law and the profit-growth relationship imply a further question with regards to the relationship between firm size and profitability. RBV suggests a positive relationship between firm size and profitability, which is supported by several scholars (Lee, 2009;Mukhopadhyay & AmirKhalkhali, 2010;Pervan & Višic, 2012;Babalola, 2013) but also contradicted by others (Baum et al, 2001;Greve, 2008). Firm size measures employed were a combination of asset value (Babalola, 2013;Lee, 2009;Pervan & Višic, 2012), sales (Babalola, 2013;Mukhopadhyay & AmirKhalkhali, 2010;Greve, 2008) and number of employees (Baum et al 2001).…”

“…If accepting the growth-profit trade-off, and Gibrat's Law, the logical assumption is the independence of firm size and profitability. A negative relationship between size and growth is shown in the results of investigating non-manufacturing sectors (Bhattacharyya & Saxena, 2009), while in several empirical studies, a positive size-profitability is demonstrated (Lee, 2009;Mukhopadhyay & AmirKhalkhali, 2010;Kouser, 2012;Babalola, 2013;Pervan & Višić, 2012). These empirical results contradict the supposed independence derived from the growth-profit trade-off assumption and Gibrat's Law, emphasising the need for research in the profit-growth nexus.…”

“…For the purposes of investigation, it has been determined that it is advantageous to choose a population from a particular country and industry, eliminating cross-industry variation. Audretsch et al (2004) for instance investigate the services sector, Daunfeldt and Elert (2013) study innovative sectors, others explore manufacturing (Lee, 2009) and non-manufacturing (Bhattacharyya & Saxena, 2013) sectors, deriving a variety of conclusions. Focusing on ICT firms promises in terms of being subject to research is its inherent dynamism, and the likelihood of providing a context in which the study can go beyond the mere statistical confirmation of Gibrat's Law.…”