Effect of Firm Size on Profitability

Abstract

Firm size has been recognized as an essential variable in explaining organizational profitability and a number of studies have tried to explore the effect of firm size on profitability. However the results of these prior studies have been inconsistent and controversial, thus calling for further investigation. This study examined the effect of firm size on the profitability of Nigerian manufacturing sector. Panel data set over the period of 2005-2012 was obtained from the audited annual reports of the selected manufacturing firms listed in the Stock Exchange. Return on assets (ROA) was used as a proxy for profitability while log of total assets and log of turnover were used as proxies for firm size. Furthermore, liquidity, leverage and the ratio of inventories to total assets were used as the control variables. The results of the study revealed that firm size, both in terms of total assets and in terms of total sales, has a positive effect on the profitability of Nigerian manufacturing companies. Meanwhile, on the control variables, a negative relationship with inventory was obtained while others have positive relationship. It is recommended is for future researchers to investigate sector effects on the relationship between firm size and profitability in Nigeria.