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Size and performance of Indian manufacturing firms: new evidence from dynamic panel system GMM approach

Author

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  • Baiju Pallayil

    (National Institute of Technology Goa)

  • Sunil Kumar Ambrammal

    (National Institute of Technology Goa)

Abstract

This paper tests the empirical relationship between firm size and firm performance in India's manufacturing sector, using a panel data set from 2007 to 2019. The study used the System GMM dynamic panel approach to solve the endogeneity problem. We analyze the relationship of two necessary measures of firm size with different firm performance indicators, including market-based performance measures like Tobin's Q (TQ) and accounting-based performance measures like return on assets (ROA) and return on net worth (RON) under both short-run and long-run period. Based on the empirical results, we find that firm size, financial performance, and growth opportunities enhance firms' overall accounting performance (ROA and RON) in both short and long-run periods. However, the firm's size negatively impacts its market performance in the short- and long-run. Our results support the (Hayashi, Econometrica 50:213–224, 1982) Q theory of investment. The study shows that the size of a firm not only improves the firm's performance in the short and long run but also weakens the negative effect of R&D intensity in the short run.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:snbeco:v:2:y:2022:i:12:d:10.1007_s43546-022-00375-3
    DOI: 10.1007/s43546-022-00375-3
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    More about this item

    Keywords

    Firm size; Firm performance; Indian manufacturing sector; Endogeneity; System GMM; Dynamic panel data;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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