Is there an Association between Firm Size and Financial Performance?

Abstract

Formulating organisational objectives and strategies such as ‘growing the firm’ and ‘improving financial performance’ is a common practice. This paper reiterates that the concepts of ‘firm size’ and ‘financial performance’ are not singular ideas. The study aimed to answer the research question: Is there an association between firm size and the financial performance of selected companies? A descriptive research design was applied, and quantitative analysis was performed. Secondary data were extracted from financial statements through IRESS. The research set out predetermined sampling criteria for sample selection. Correlations were measured between financial ratios and different proxies of firm size. Frequencies of the different significant correlations were counted. The findings indicated that firm size proxies and measures of financial performance were either directly or inversely related. Profitability measures were inversely related to total assets and sales. Liquidity measures were associated with sales, while solvency measures were associated with sales and number of employees. Measures of market performance were inversely associated with market capitalisation. This paper contributes to academic knowledge by indicating that financial data of sampled South African companies deliver associations between firm size proxies and financial performance measures. These associations are not identical to the findings obtained by other researchers in different locations. The practical implications of this research entail that managers of South African companies need to select financial performance indicators and base the firm size estimation on proxies associated with such financial performance indicators. Limitations included that findings cannot be generalised, that the researchers relied on the integrity of audited financial statements and that IRESS did not make a full set of data available for all sampled entities. Limitations may inspire further research as the methodology may be mimicked by selecting another research sample.

Keywords: financial performance; ratio analysis; firm size; JSE listed companies; financial ratios