Sensitivity of firm size measures to practices of corporate finance: evidence from BRICS

Zeshan Ghafoor,Saqib Gulzar,Syed Danial Hashmi,Iram Naz

doi:10.1186/s43093-020-00015-y

Zeshan Ghafoor, Saqib Gulzar + Show 2 more

Open Access

https://doi.org/10.1186/s43093-020-00015-y

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Abstract

Firm size has remained a major area of investigation for researchers from a long time. This study aims at examining impact of different measures of firm size (total assets, total sales, market capitalization and number of employees) on seven important practices of corporate finance which are financial policy, dividend policy, investment policy, diversification, firm performance, compensation and incentives and board structure (corporate governance). Moreover, this study also examines the sensitivity of different proxies of firm size on these practices of corporate finance. Data from BRICS (Brazil, Russia, India, China and South Africa) have been analysed. Overall results supported the hypotheses. Study concludes that different proxies of firm size are differently related to practices of corporate finance based on sign, significance and R2. All proxies capture different aspects of firm size and have different implications for corporate finance. Thus, this study confirms “measurement effect” in “size effect”. Unfortunately, this means that many of past studies may not be robust and are biased. Researchers thus need to be careful when selecting any proxy of firm size for their research keeping in mind the scope and context of their work. Choosing a proxy thus is a theoretical and empirical question.

Highlights

Firm size has remained a major area of investigation in corporate finance
Firm size as measured by total assets is significantly correlated with financial leverage (r = 0.11, p < 0.05), financial leverage (r = 0.17, p < 0.05), business segments, i.e. diversification (r = 0.20, p < 0.05), dividend policy (r = 0.18, p < 0.05), Capital expenditure (CAPEX), i.e. investment policy (r = 0.16, p < 0.05), independent directors (r = 0.20, p < 0.05), non-executive directors (r = 0.23, p < 0.05), pay level (r = 0.18, p < 0.05), return on assets (ROA) (r = 0.19, p < 0.05) and return on equity (ROE) (r = 0.06, p < 0.10)
It can be seen that size as measured by total sales is significantly correlated with financial leverage (r = 0.19, p < 0.05), financial leverage (r = 0.16, p < 0.05), business segments, i.e. diversification (r = 0.19, p < 0.05), dividend policy (r = 0.25, p < 0.05), CAPEX, i.e. investment policy (r = 0.34, p < 0.05), independent directors (r = 0.23, p < 0.05), non-executive directors (r = 0.18, p < 0.05), pay level (r = 0.20, p < 0.05), ROA (r = 0.13, p < 0.05) and ROE (r = 0.17, p < 0.05)

Summary

Introduction

Firm size has remained a major area of investigation in corporate finance. Coase [1] is credited for the seminal work in this area. He raised questions on what determines firm boundaries and how these boundaries affect allocation of resources. What determines firm size has remained a major question under investigation by the researchers. Different theories of firm explain the reasons behind the existence of a firm [2]. You [3] surveyed diverse literature on the theories of firm size (determinants and distribution) and classified the literature into four streams including technological approach or the conventional microeconomics approach, institutional approach commonly known as transactional economics approach, industrial organizational (IO economics) approach and dynamic modelling approach

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