The Impact of Firm Size on Profitability of Non-Financial companies of Pakistan

Abstract

Purpose: The main purpose of the study is to assess the impact of the firm size on the profitability of the non-financial companies in Pakistan.

Design/Methodology/Approach: This section of the research design focuses on using a balanced panel data analysis of the 447 non-financial companies of Pakistan from 2014 to 2023. The analysis is done properly to understand the relationship between the firm size by taking a log of the total assets (LTA) of all the companies and assessing the impact on the profitability that is measured by using the return on total assets (ROA). The research is properly managed by using Leverage, which is debt to total assets (LEV), as a control variable. Panel data estimation techniques are used, such as pooled ordinary least squares, fixed effects, and random effects. The Hausman specification is used to determine the most appropriate model.

Findings: The empirical results highlighted that firm size has a positive and statistically significant impact on profitability in the fixed effects model, which indicates that larger non-financial companies have higher return on assets. The findings support the economies of scale hypothesis that suggests that larger firms are able to use their resources efficiently. Leverage is actually showing a negative but insignificant relationship with profitability as firm-specific characteristics are controlled.

Implications/Originality/Value: The study provides a robust empirical model that allows us to assess the relationship between firm size and profitability in the context of emerging economies. As a comprehensive sample of non-financial companies in Pakistan is studied, it allows corporate investors, managers, and policymakers to make better decisions related to the role of firm size in the profitability of companies.

Keywords: Firm Size; Return on Assets; Profitability; Panel Data; Leverage; Pakistan