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Determinants of Corporate Profitability

Table 10.2 Effects of Firm Size on Profitability (t statistics are in parentheses)

Dependent Variable Size Measure Intercept Size Coefficient R Squared F Statistic
Profits Sales 2,560.5660 0.0497 36.1% 15.8
(2.2900) (3.98)
Profits Net Worth 723.9516 0.01491 64.6% 51.6
(0.80) (7.15)
Profit margin (MGN) Sales 0.1233 -2.99E-07 8.0% 2.4
(7.37) (-1.55)
Return on Equity (ROE) Net Worth 0.2207 -9.18E-07 6.9% 2.1
(7.92) (-1.43)

A. Based upon the findings reported in Table 10.2, discuss the relation between firm size and profitability, and the link, if any, between firm size and profit rates. In general, does large firm size increase profitability?

B. Using a spreadsheet (Table 1.1), sort the DJIA according to profit rates and firm size. Use firm-specific information found on company Web sites or investment portals, like Yahoo! Finance or MSN/Money to explain the superior profitability of these corporate giants.

C. What other important factors might be included in a more detailed study of the determinants of corporate profitability?
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A. Based upon the findings reported in Table 10.2, discuss the relation between firm size and profitability, and the link, if any, between firm size and profit rates. In general, does large firm size increase profitability?
The total profits of a firm increase as the size of the firm increases. Both the models are statistically significant. While the sales as a measure of size explains around 36.1% variance in profits, the networth as a measure of size do a considerably better job by explaining around 64.6% variance in profits. However, when we look at ...

Solution Summary

This problem presents the regression between the profitability of the firm and different measures of size of the firm. The solution interprets this information and analyzes the relationship between firm size and firm profitability. Concepts such as R-square, etc. for interpreting the regression output and how to use the financial information to take corporate decisions are discussed

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