THE EFFECT OF FIRM SIZE ON PROFITABILITY: EVIDENCE FROM TURKISH MANUFACTURING SECTOR

Abstract

Purpose - This study investigates whether size of 112 publicly listed firms in manufacturing sector affects their profitability in Turkey during the period 2005-2013.

Methodology - Dynamic panel data approach (i.e. two-step system GMM estimator) taking into account potential endogeneity of firm-level variables is employed to estimate the effect of alternative firm size indicators on firm profitability.  

Findings- Estimation results suggest that after controlling for financial risk, liquidity level, growth opportunities, unsystematic risk, firm age, and the other factors, the indicators of firm size measured by firm’s assets, sales and number of employees tend to have a positive influence on the profitability of firm measured by operating return on assets.

Conclusion- There is enough statistical evidence to support a linear relation between firm size measures and profitability of firms in the period analyzed. However, our empirical results do not support the quadratic or cubic association between size measures and profitability.

Keywords

• Size-profitability relationship,dynamic panel data,manufacturing industry,Borsa Istanbul,Turkey

References

1. Amato, L. and Wilder, R. (1985). The effects of firm size on profit rates in US manufacturing. Southern Economic Journal, 52(1), 181–190.
2. Amato, L.J. and Amato, C. H. (2004). Firm size, strategic advantage, and profit rates in US retailing. Journal of Retailing and Consumer Services, 11(3), 181–193.
3. Antoniou, A., Guney, Y. and Paudyal, K. (2008). The determinants of capital structure: Capital market-oriented versus bank-oriented institutions. Journal of Financial and Quantitative Analysis, 43(1), 59–92.
4. Aytürk, Y. and Yanık, S. (2015). Çalışma sermayesi yönetimi Türkiye’deki KOBİ’lerde karlılığı nasıl etkiler? Muhasebe ve Finansman Dergisi, 10, 157-168.
5. Baltagi, B. (2014). Econometric analysis of panel data (5th ed.). UK, Cornwall: Wiley.
6. Becker-Blease, J. R., Kaen, F. R., Etebari, A. and Baumann, H. (2010). Employees, firm size and profitability in US manufacturing industries. Investment Management and Financial Innovations, 7(2), 7-23.
7. Blundell, R. and Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115-143.
8. Celikyurt, U. and Donmez, B. N. (2017). Engineer CEOs and firm performance in BIST manufacturing Firms. Muhasebe ve Finansman Dergisi, 75, 171-182.

9. Delcoure, N. (2007). The determinants of capital structure in transitional economies. International Review of Economics and Finance, 16(3), 400-415.
10. Doğan, M. (2013). Does firm size affect the firm profitability? Evidence from Turkey. Research Journal of Finance and Accounting, 4(4), 5359.
11. Fama, E.F. and Jensen, M.C. (1983). Separation of ownership and control. Journal of Law and Economics, 26, 301–349.
12. Goddard, J., Tavakoli, M. and Wilson, J.O.S. (2005). Determinants of profitability in European manufacturing and services: Evidence from dynamic panel model. Applied Financial Economics, 15(18), 1269-1282.
13. Gonenc, H., Kan, O.B. and Karadagli, E.C. (2007). Business groups and internal capital markets. Emerging Markets Finance and Trade, 43(2), 63-81.
14. Gujarati, D. (2004). Basic econometrics (4th ed.). New York, USA: The McGraw-Hill Companies.
15. Hatem, B.S. (2014). Determinants of firm performance: A comparison of European countries. International Journal of Economics and Finance, 6(10), 243-249.
16. Işık, Ö. (2017). Determinants of Profitability: Evidence from Real Sector Firms Listed in Borsa Istanbul. Business and Economics Research Journal, 8(4), 689-698.
17. Isik, O., and Tasgin, U.F. (2017). Profitability and Its Determinants in Turkish Manufacturing Industry: Evidence from a Dynamic Panel Model. International Journal of Economics and Finance, 9(8), 66-75.
18. Jensen, M.C. and Meckling, W.H. (1976). Theory of the firm: Managerial behaviour, agency costs and ownership structure. Journal of Financial Economics, 3, 305–360.
19. Jónsson, B. (2007). Does the size matter? The relationship between size and profitability of Icelandic firms. Bifröst Journal of Social Sciences, 1, 43-55.
20. Kumar, K.B., Rajan, R.G. and Zingales, L. (2001). What determines firm size. University of Chicago: Mimeo.
21. Lee, J. (2009). Does size matter in firm performance? Evidence from US public firms. International Journal of the economics of Business, 16(2), 189-203.
22. Liu, Y., Wei, Z. and Xie, F. (2014). Do women directors improve firm performance in China? Journal of Corporate Finance, 28, 169-184.
23. Mule, R.K., Mukras, M.S. and Nzioka, O.M. (2015). Corporate size, profitability and market value: An econometric panel analysis of listed firms in Kenya. European Scientific Journal, 11(13), 376-396.
24. Nakano, M. and Nguyen, P. (2013). Foreign ownership and firm performance: Evidence from Japan's electronics industry. Applied Financial Economics, 23(1), 41-50.
25. Ng, A., Yuce, A. and Chen, E. (2009). Determinants of state equity ownership, and its effect on value/performance: China's privatized firms. Pacific-Basin Finance Journal, 17(4), 413-443.
26. Nickell, S.J. (1981). Biases in dynamic models with fixed effects. Econometrica, 49, 1417—1426.
27. Niresh, J.A. and Velnampy, T. (2014). Firm size and profitability of listed manufacturing firms in Sri Lanka. International Journal of Business and Management, 9(4), 57-64.
28. Pervan, M. and Višić, J. (2012). Influence of firm size on its business success. Croatian Operational Research Review, 3(1), 213-223.
29. Pattitoni, P., Petracci, B. and Spisni, M. (2014). Determinants of profitability in the EU-15 area. Applied Financial Economics, 24(11), 763775.
30. Prasetyantoko, A. and Parmono, R. (2009). Does firm size matter? An empirical study of firm performance in Indonesia. International Research Journal of Business Studies, 2(2), 87-97.
31. Rajan, R. G. and Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. Journal of Finance, 50, 1421–60.
32. Roodman, D. (2009). How to do Xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9, 86-136.
33. Sciascia, S. and Mazzola, P. (2008). Family involvement in ownership and management: Exploring nonlinear effects on performance. Family Business Review, 21(4), 331-345.
34. Serrasqueiro, Z. S. and Nunes, P. M. (2008). Performance and size: Empirical evidence from Portuguese SMEs. Small Business Economics, 31(2), 195-217.
35. Shehata, N., Salhin, A. and El-Helaly, M. (2017). Board diversity and firm performance: Evidence from the U.K. SMEs. Applied Economics, 49(48), 1-16.
36. Stierwald, A. (2010). Determinants of profitability: An analysis of large Australian firms. The University of Melbourne, Melbourne Institute Working Papers Series, Working Paper No.3/10.
37. Veprauskaitė, E. and Adams, M. (2013). Do powerful chief executives influence the financial performance of UK firms. The British Accounting Review, 45(3), 229-241.
38. Voulgaris, F. and Lemonakis, C. (2014). Competitiveness and profitability: The case of chemicals, pharmaceuticals and plastics. The Journal of Economic Asymmetries, 11, 46-57.
39. Windmeijer, F. (2005). A finite sample correction for the variance of linear efficient two-step GMM estimators. Journal of Econometrics, 126(1), 25-51.