Firm Size-Profitability Nexus

What is it about?

The bulk of extant studies on the relationship between firm size and profitability focus on the effect of former on the latter, neglecting the possibility of feedback effect. This research work re-examines the direction of causality between firm size and profitability for 63 listed non-financial Nigerian firms for the period 1998–2010, using an innovative econometric methodology of a differenced dynamic generalized method of moments to resolve the problem of endogeneity inherent in the relationship. The results establish a bidirectional relationship between firm size and profitability of firms in Nigeria. While firm size positively Granger-causes profitability, profitability, on the other hand, negatively Granger-causes firm size. This study therefore rebuts the popular assumption that causation only runs from firm size to profitability and not vice versa. The emerging conclusion drawn from this study is that profitability might be a vital tool to make firms grow faster if well managed as the economies of scale could also be induced

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Why is it important?

It provides policy guide to firms, most especially listed firms, on the relationship between firm size and profitability.

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