IDEAS home Printed from https://ideas.repec.org/a/sae/globus/v18y2017i3p543-558.html
   My bibliography  Save this article

Re-examining Firm Size-profitability Nexus: Empirical Evidence from Non-financial Listed Firms in Nigeria

Author

Listed:
  • Clement Olalekan Olaniyi
  • Olayemi O. Simon-Oke
  • Olufemi Bodunde Obembe
  • Segun Thompson Bolarinwa

Abstract

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 dynamic panel 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.

Suggested Citation

  • Clement Olalekan Olaniyi & Olayemi O. Simon-Oke & Olufemi Bodunde Obembe & Segun Thompson Bolarinwa, 2017. "Re-examining Firm Size-profitability Nexus: Empirical Evidence from Non-financial Listed Firms in Nigeria," Global Business Review, International Management Institute, vol. 18(3), pages 543-558, June.
    • Handle: RePEc:sae:globus:v:18:y:2017:i:3:p:543-558
    DOI: 10.1177/0972150917692064
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/0972150917692064
    Download Restriction: no
    File URL: https://libkey.io/10.1177/0972150917692064?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-1395, November.
    2. Katz, Michael L, 1987. "The Welfare Effects of Third-Degree Price Discrimination in," American Economic Review, American Economic Association, vol. 77(1), pages 154-167, March.
    3. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, vol. 115(1), pages 53-74, July.
    4. Jaideep Anand & Harbir Singh, 1997. "Asset Redeployment, Acquisitions And Corporate Strategy In Declining Industries," Strategic Management Journal, Wiley Blackwell, vol. 18(S1), pages 99-118, July.
    5. Rousseau, P. L. & Wachtel, P., 2000. "Equity markets and growth: Cross-country evidence on timing and outcomes, 1980-1995," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1933-1957, December.
    6. repec:bla:obuest:v:61:y:1999:i:0:p:631-52 is not listed on IDEAS
    7. Gale, Bradley T, 1972. "Market Share and Rate of Return," The Review of Economics and Statistics, MIT Press, vol. 54(4), pages 412-423, November.
    8. Whittington, Geoffrey, 1980. "The Profitability and Size of United Kingdom Companies, 1960-74," Journal of Industrial Economics, Wiley Blackwell, vol. 28(4), pages 335-352, June.
    9. Trevor Buck & Xiaohui Liu & Rodion Skovoroda, 2008. "Top executive pay and firm performance in China," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 39(5), pages 833-850, July.
    10. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, April.
    11. Shepherd, William G, 1972. "The Elements of Market Structure," The Review of Economics and Statistics, MIT Press, vol. 54(1), pages 25-37, February.
    12. Zélia Serrasqueiro & Paulo Maçãs Nunes, 2008. "Performance and size: empirical evidence from Portuguese SMEs," Small Business Economics, Springer, vol. 31(2), pages 195-217, August.
    13. Jim Lee, 2009. "Does Size Matter in Firm Performance? Evidence from US Public Firms," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 16(2), pages 189-203.
    14. Sayan Chatterjee, 1986. "Types of synergy and economic value: The impact of acquisitions on merging and rival firms," Strategic Management Journal, Wiley Blackwell, vol. 7(2), pages 119-139, March.
    15. Asli Demeirgüç-Kunt & Ross Levine (ed.), 0. "Finance and Growth," Books, Edward Elgar Publishing, number 17119.
    16. John Goddard & Manouche Tavakoli & John Wilson, 2005. "Determinants of profitability in European manufacturing and services: evidence from a dynamic panel model," Applied Financial Economics, Taylor & Francis Journals, vol. 15(18), pages 1269-1282.
    17. Chen, Pei-Fen & Lee, Chien-Chiang & Chiu, Yi-Bin, 2014. "The nexus between defense expenditure and economic growth: New global evidence," Economic Modelling, Elsevier, vol. 36(C), pages 474-483.
    18. Richard Makadok, 1999. "Interfirm differences in scale economies and the evolution of market shares," Strategic Management Journal, Wiley Blackwell, vol. 20(10), pages 935-952, October.
    19. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300.
    20. Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780199245291.
    21. Wintoki, M. Babajide & Linck, James S. & Netter, Jeffry M., 2012. "Endogeneity and the dynamics of internal corporate governance," Journal of Financial Economics, Elsevier, vol. 105(3), pages 581-606.
    22. John Goddard & Phil Molyneux & John O. S. Wilson, 2004. "The profitability of european banks: a cross‐sectional and dynamic panel analysis," Manchester School, University of Manchester, vol. 72(3), pages 363-381, June.
    23. Athanasoglou, Panayiotis & Delis, Manthos & Staikouras, Christos, 2006. "Determinants Of Bank Profitability In The South Eastern European Region," MPRA Paper 10274, University Library of Munich, Germany.
    24. Chang, Hsin-Chen & Huang, Bwo-Nung & Yang, Chin Wei, 2011. "Military expenditure and economic growth across different groups: A dynamic panel Granger-causality approach," Economic Modelling, Elsevier, vol. 28(6), pages 2416-2423.
    25. G. S. Maddala & Shaowen Wu, 1999. "A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(S1), pages 631-652, November.
    26. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    27. Căpraru Bogdan & Ihnatov Iulian, 2015. "Determinants Of Bank’s Profitability In EU15," Scientific Annals of Economics and Business, Sciendo, vol. 62(1), pages 93-101, April.
    28. David Roodman, 2008. "Through the Looking-Glass, and What OLS Found There: On Growth, Foreign Aid, and Reverse Causality," Working Papers 137, Center for Global Development.
    29. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    30. Breitung, Jorg, 2002. "Nonparametric tests for unit roots and cointegration," Journal of Econometrics, Elsevier, vol. 108(2), pages 343-363, June.
    31. Cockburn, Iain M. & Henderson, Rebecca M., 2001. "Scale and scope in drug development: unpacking the advantages of size in pharmaceutical research," Journal of Health Economics, Elsevier, vol. 20(6), pages 1033-1057, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Segun Thompson Bolarinwa & Richard Olaolu Olayeni & Xuan Vinh Vo, 2021. "Is there a nonlinear relationship between nonperforming loans and bank profitability? Evidence from dynamic panel threshold," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 649-661, April.
    2. Clement Olalekan Olaniyi & Titus Ayobami Ojeyinka & Xuan Vinh Vo & Mamdouh Abdulaziz Saleh Al‐Faryan, 2023. "Do business strategies vary across firms in the banking industry? New perspectives from the bank size–profitability nexus," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 525-544, January.
    3. Rayenda Khresna Brahmana & Hui San Loh & Maria Kontesa, 2020. "Market Competition, Managerial Incentives and Agency Cost," Global Business Review, International Management Institute, vol. 21(4), pages 937-955, August.
    4. Clement Olalekan Olaniyi & Ademola Obafemi Young & Xuan Vinh Vo & Mamdouh Abdulaziz Saleh Al‐Faryan, 2022. "Do institutional framework and its threshold matter in the sensitivity of CEO pay to firm performance? Fresh insights from an emerging market economy," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(8), pages 3386-3403, December.
    5. Ayobami Ojeyinka, Titus & Enisan Akinlo, Anthony, 2021. "Does Bank Size Affect Efficiency? Evidence From Commercial Banks In Nigeria," Ilorin Journal of Economic Policy, Department of Economics, University of Ilorin, vol. 8(1), pages 79-100, June.
    6. Clement Olalekan Olaniyi & Olufemi Bodunde Obembe & Emmanuel Oluwole Oni, 2017. "Analysis of the Nexus between CEO Pay and Performance of Non-Financial Listed Firms in Nigeria," African Development Review, African Development Bank, vol. 29(3), pages 429-445, September.
    7. Segun Thompson Bolarinwa & Olufemi Bodunde Obembe, 2019. "Firm Size–Profitability Nexus: An Empirical Evidence from Nigerian Listed Financial Firms," Global Business Review, International Management Institute, vol. 20(5), pages 1109-1121, October.
    8. Qiao Liang & Rongrong Bai & Zhi Jin & Linlin Fu, 2023. "Big and strong or small and beautiful: Effects of organization size on the performance of farmer cooperatives in China," Agribusiness, John Wiley & Sons, Ltd., vol. 39(1), pages 196-213, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Segun Thompson Bolarinwa & Olufemi Bodunde Obembe, 2017. "Concentration–Profitability Nexus: New Approach from Causality," Studies in Microeconomics, , vol. 5(1), pages 84-98, June.
    2. Clement Olalekan Olaniyi & Olaolu Richard Olayeni, 2020. "A new perspective into the relationship between CEO pay and firm performance: evidence from Nigeria’s listed firms," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 22(2), pages 250-277, December.
    3. Clement Olalekan Olaniyi & Sunday Idowu Oladeji, 2021. "Moderating the effect of institutional quality on the finance–growth nexus: insights from West African countries," Economic Change and Restructuring, Springer, vol. 54(1), pages 43-74, February.
    4. Chen, Pei-Fen & Lee, Chien-Chiang & Chiu, Yi-Bin, 2014. "The nexus between defense expenditure and economic growth: New global evidence," Economic Modelling, Elsevier, vol. 36(C), pages 474-483.
    5. Segun Thompson Bolarinwa & Olufemi Bodunde Obembe, 2019. "Firm Size–Profitability Nexus: An Empirical Evidence from Nigerian Listed Financial Firms," Global Business Review, International Management Institute, vol. 20(5), pages 1109-1121, October.
    6. Clement Olalekan Olaniyi & Olufemi Bodunde Obembe & Emmanuel Oluwole Oni, 2017. "Analysis of the Nexus between CEO Pay and Performance of Non-Financial Listed Firms in Nigeria," African Development Review, African Development Bank, vol. 29(3), pages 429-445, September.
    7. Taiwo Akinlo, 2019. "The causal relationship between financial development and real sector in sub-Saharan Africa (1986–2015)," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 21(1), pages 116-142, June.
    8. Ortiz, Cristian & Alvarado, Rafael & Salinas, Aldo, 2019. "The effect of military spending on output: New evidence at the global and country group levels using panel data cointegration techniques," Economic Analysis and Policy, Elsevier, vol. 62(C), pages 402-414.
    9. Baiju Pallayil & Sunil Kumar Ambrammal, 2022. "Size and performance of Indian manufacturing firms: new evidence from dynamic panel system GMM approach," SN Business & Economics, Springer, vol. 2(12), pages 1-22, December.
    10. Rudra P. Pradhan & Mak B. Arvin & Sara E. Bennett & Mahendhiran Nair & John H. Hall, 2016. "Bond Market Development, Economic Growth and Other Macroeconomic Determinants: Panel VAR Evidence," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 23(2), pages 175-201, June.
    11. Segun Thompson Bolarinwa & Richard Olaolu Olayeni & Xuan Vinh Vo, 2021. "Is there a nonlinear relationship between nonperforming loans and bank profitability? Evidence from dynamic panel threshold," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(3), pages 649-661, April.
    12. Lee, Chien-Chiang & Chang, Chun-Ping, 2007. "Energy consumption and GDP revisited: A panel analysis of developed and developing countries," Energy Economics, Elsevier, vol. 29(6), pages 1206-1223, November.
    13. Hassan Hamadi & Charbel Bassil, 2015. "Financial Development and Economic Growth in the MENA Region," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 57(4), pages 598-622, December.
    14. Alessio Ciarlone, 2019. "The relationship between financial development and growth: the case of emerging Europe," Questioni di Economia e Finanza (Occasional Papers) 521, Bank of Italy, Economic Research and International Relations Area.
    15. Thorsten Beck, 2009. "The Econometrics of Finance and Growth," Palgrave Macmillan Books, in: Terence C. Mills & Kerry Patterson (ed.), Palgrave Handbook of Econometrics, chapter 25, pages 1180-1209, Palgrave Macmillan.
    16. Rudra P. Pradhan, 2018. "Development of stock market and economic growth: the G-20 evidence," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 8(2), pages 161-181, August.
    17. Samargandi, Nahla & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries," World Development, Elsevier, vol. 68(C), pages 66-81.
    18. Fakhri J. Hasanov & Nigar Bayramli & Nayef Al-Musehel, 2018. "Bank-Specific and Macroeconomic Determinants of Bank Profitability: Evidence from an Oil-Dependent Economy," IJFS, MDPI, vol. 6(3), pages 1-21, September.
    19. Pradhan, Rudra P. & Arvin, Mak B. & Hall, John H., 2016. "Economic growth, development of telecommunications infrastructure, and financial development in Asia, 1991–2012," The Quarterly Review of Economics and Finance, Elsevier, vol. 59(C), pages 25-38.
    20. Rudra P. Pradhan & Mak B. Arvin & John H. Hall & Sahar Bahmani, 2014. "Causal nexus between economic growth, banking sector development, stock market development, and other macroeconomic variables: The case of ASEAN countries," Review of Financial Economics, John Wiley & Sons, vol. 23(4), pages 155-173, November.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:globus:v:18:y:2017:i:3:p:543-558. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: http://www.imi.edu/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.