Title: The Relationship Between Firm Size and Profitability for Listed Companies in Hong Kong
Background to Study
The relationship between firm size and profitability has been studied by many scholars in different contexts, but the conclusions have been controversial. Extensive academic work has been done in economics, finance, marketing and strategic management, began to study the source of profit of the enterprise.
Investors generally first understand the company’s financial performance and status before deciding whether to invest funds in the capital market. In order for investors to have the interest and confidence to invest their funds, management must create high profitability to improve performance (Ha and Minh 2018).
Return on Assets (ROA) and Return on Equity (ROE) are two effective indicators that can be used to measure company performance. The influence of large corporations in the corporate environment is increasing with the rise of globalization (Peng, 2016). Company size comprises the company’s capacity and capability in the context of the amount and type of production capacity that the company can offer to its customers at the same time.
The opportunity to achieve economies of scale may be the greatest advantage for a larger-sized company. Large companies can take advantage of this phenomenon by maintaining a high market share and producing at a lower cost, thereby gaining a long-term competitive advantage over smaller companies. Profitability refers to the amount of profit or money that a company can generate within its limited resources in an organizational setting.
All management and planning efforts are aimed at increasing profitability in most cases (Best, 2012). More profitable companies can easily expand their operations through internal financing. However, the way of financing is directly related to the market position and stock price, so companies should choose the way of financing carefully (Seitz and Ellison, 1998).
In theory, there is evidence that economies of scale can be achieved if firms are larger (Grover, 2013). Since the economies of scale of large firms empower them to negotiate prices and quantities in a more specialist manner and make volume purchases, which directly affects sales and profitability (Asimakopoulos, Samitas & Papadogonas, 2009).
However, the results of whether firm size can be used as a predictor of profitability under different scenarios vary, and further research is needed on this relationship. We aim to contribute to the existing literature with empirical evidence on the four-year data from 2017 to 2020 of Hong Kong-listed companies in the Hang Seng Composite Index.
Aim
Since many investors will blindly follow outside news to make investment decisions. Some people will think that the bigger the company, the higher the profitability. This study aims to understand the relationship between the firm size and profitability of Hong Kong-listed companies. The findings will contribute to a broad range of investors, adding valuable knowledge and will aid in their respective investment decisions after the research is complete.
Research Objectives
The objectives of this study are to:
- Identify the impact of economic of scale, agency theory, and organization theory by reviewing relevant academic literature
- Examine company size and profitability through the company’s financial statement and income statement
- Analyze the relationship between the firm size and profitability and the strength of the correlation between the firm size and profitability for Hong Kong-listed companies listed on the HSCI (Hang Seng Composite Index)
- Identify any limitations of utilizing a company’s financial statements and income statement to examine company size and profitability
- Advice on how to improve the situation under the influence of economies of scale or agency issues and how to make company profitability unaffected by firm size