Measures Of Firm Size Research Articles

Firm-size elasticity of top management team compensation in Saudi Arabian listed firms

We evaluate the firm-size elasticity of top management team (TMT) compensation with a sample of 80 firms listed in Saudi Arabian stock market. We find that the TMT compensation increases with firm size. The results are found to be robust when the total assets as the firm size measure is altered with other proxies, sales and market value of the firm. We show that the firm size and TMT compensation relationship is same as in the case of all firms sample when the firms are grouped into family firms and nonfamily firms. This finding is in line with the results of the previous studies that analyze the link between CEO compensation and firm size. We conclude that the large firms are willing to pay high compensation not just to their CEOs but also to the entire team at the top

A Study of Differences in Returns between Large and Small Companies in Europe

This report consists of two parts. The first part is a research note describing a comprehensive analysis of the realized return differential between small and large firms (i.e., the premium) in a sample of European stocks during the period between 1990 and 2013. This study establishes that during the period under examination small European stocks earned a statistically and economically significant size premium relative to large stocks. The observed size premium is robust to controlling for size-related beta differences as well as to changes in the metric used to measure size. The second part of the report presents a large collection of exhibits – and a brief description of the procedures and assumptions underlying these exhibits – that can help the analyst in estimating the cost of equity capital for European businesses using various measures of firm size. The study described in this report was commissioned by Duff & Phelps LLC and conducted by the Erasmus Centre for Valuation and Accounting, Rotterdam School of Management, Erasmus University.

MANUFACTURING FIRM SIZE DISTRIBUTION IN IRAN EVIDENCE FROM FOOD & BEVERAGES AND NON-METALLIC MINERAL PRODUCTS

Empirical studies have shown that the size distribution of firms can be described as a lognormal or Pareto distribution. However, these studies have focused on developed countries and little attention has been devoted to developing countries. Using the variable of number of employees as a measure of firm size, this paper investigates the shape of firm size distribution in the food & beverages industry and also in the non-metallic mineral products industry over the period of 1997-2005. Our findings show that there is no universality of the size distribution of firms between industries. In other words, the size distribution varies in terms of kind of industry, so that our results make it clear that food & beverages industry follows lognormal distribution, conversely to other industry which a good representation of Pareto distribution. From policy point of view, knowledge about firm size distribution caused new entrance firms to decide wisely and therefore provide improvement on performance after entry.

A Systematic Approach to Measures of Systemic Risk

The failure of individual firms in the banking industry poses a unique threat to the entire economy. Emerging wisdom on systemic risk has identified two shortcomings in traditional regulatory approaches, all of which failed to anticipate the financial crisis of 2008-09. First, static measures of firm size, designed to identify institutions too big to fail, fall short of detecting the contributions of correlation and interconnectedness to systemically significant bank failures. Second, traditional regulatory emphasis on capital adequacy has sought to guide the management of expected risks by individual banks under ordinary conditions, at the expense of anticipating the collective reaction of the banking industry to extreme stress. This anthology summarizes work toward a rigorous, systematic understanding of measures of systemic risk.

On Welfare Losses Due to Imperfect Competition

Corporate managers and executive compensation in many industries place significant emphasis on measures of firm size, such as sales revenue or market share. Such objectives have an important—yet thus far unquantified—impact on market performance. With n symmetric firms, equilibrium welfare losses are of order 1/n4, and thus vanish extremely quickly. Welfare losses are less than 5% for many empirically relevant market structures, despite significant firm asymmetry and industry concentration. They can be estimated using only basic information on market shares. These results also apply to oligopsonistic competition (e.g., for retail bank deposits) and strategic forward trading (e.g., in restructured electricity markets).

Measuring Firm Size in Empirical Corporate Finance

In empirical corporate finance, firm size is commonly used as an important, fundamental firm characteristic. However, no research comprehensively assesses the sensitivity of empirical results in corporate finance to different measures of firm size. This paper fills this hole by providing empirical evidence for a “measurement effect” in the “size effect”. In particular, we examine the influences of employing different proxies (total assets, total sales, and market capitalization) of firm size in 20 prominent areas in empirical corporate finance research. We highlight several empirical implications. First, in most areas of corporate finance the coefficients of firm size measures are robust in sign and statistical significance. Second, the coefficients on regressors other than firm size often change sign and significance when different size measures are used. Unfortunately, this suggests that some previous studies are not robust to different firm size proxies. Third, the goodness of fit measured by R-squared also varies with different size measures, suggesting that some measures are more relevant than others in different situations. Fourth, different proxies capture different aspects of “firm size”, and thus have different implications. Therefore, the choice of size measures needs both theoretical and empirical justification. Finally, our empirical assessment provides guidance to empirical corporate finance researchers who must use firm size measures in their work.

Additional Evidence on the Relationship between an Internal Audit Function and External Audit Fees in Australia

Studies examining the relationship between a firm's internal audit (IA) function and its audit fees have produced mixed results with suggestions of possible model mis‐specification in these studies. Our analysis reveals that differences in significance for IA with audit fees is driven by the choice of variables proxying for firm size and other firm characteristics, suggesting that prior results are entangled with model specification issues. Specifically, when the sales variable is used as a measure of firm size, IA is insignificant (in explaining variations in audit fees) but subsequently becomes significant when assets and employees are used. To overcome the conflicting results, subsequent factor analysis supported a positive relationship between IA and audit fees. The most significant implication from this study is that previously reported relationships involving audit fees may be the outcome of the model adopted rather than the underlying relationship between the variable of interest and audit fees

Fundamental Indexation For Global Equities: Does Firm Size Matter?

Market capitalization is often used as the weighting methodology for broad market indexes to reflect the performances of large established firms in the market. The market capitalization of a firm is a price-sensitive measure of firm size that self-adjusts to reflect the firms intrinsic value in an efficient capital market. In the presence of investor overreaction, the price-sensitive cap-weighted indexes cease to be mean-variance efficient in that they overweigh overvalued assets and under weigh undervalued assets. Fundamental indexation, proposed by Arnott, Hsu and Moore (2005), argue that fundamental values of a firm such as book value, revenues and earnings are price-insensitive, and hence are not subject to the systematic overshooting of asset prices through noise trading. The aim of this paper is to test whether fundamental-weighted indexes are more mean-variance efficient proxies for large established firms in the global equity market compared to cap-weighted indexes over an extensive 18-year period from 1991 to 2008. Test results show that fundamental-weighted indexes outperform cap-weighted indexes over two sub-periods as well as the overall examination period, during an expansionary market and in turbulent times. A strong negative relationship between the degree of index concentration and the index performance is detected for cap-weighted indexes while no such relationship is detected for the fundamental-weighted indexes. Our results suggest that price-insensitive fundamental-weighted indexes are more mean-variance efficient proxies for the performances of large firms for global equities relative to cap-weighted indexes. By removing the price-element in measuring firm size, the small firm anomaly is not present in fundamental-weighted indexes.

An appraisal of firm size distribution: Does sample size matter?

Recent empirical evidence based on extensive databases shows that firm size distributions (FSD) vary with the sample. This paper analyses the effect of sample size on the FSD of Spanish manufacturing firms for the years 2001 and 2006. We use a comprehensive dataset that has two measures of firm size: sales and employment. Our database shows a skewed FSD to the right which there are numerous small firms and a few large firms. Applying a rolling regression to control for sample size developed by Peng (2010), we show the existence of a non-constant power-law distribution that depends on the sampling size. Furthermore, the FSD of employees is more sensitive to firm age than the FSD of sales.

Firm growth and firm size

This article analyses the growth rates of the complete population of UK-registered firms for the period 2001 to 2005. We estimate Gibrat's law – that growth rates are independent of firm size – by deciles of the firm size distribution. Whether we are able to reject Gibrat's law varies across deciles. We also show how estimates vary according to the measure of firm size, time period and sample selection.

Portfolios Weighted by Repurchase and Total Payout

Portfolios weighted by fundamental measures of company size, such as assets, dividends, sales, earnings, and employees, have recently attracted a lot of attention. Pioneering research has showed that these fundamental value–weighted portfolios, especially dividend-weighted portfolios, can achieve better mean returns and better Sharpe ratios than could be attained with the traditional market value– weighted portfolio. In this article, the authors examine three portfolios weighted by the additional fundamental measures of firm size—share repurchases, total payout, and earnings retention—and find that the repurchase-weighted portfolios and total payout–weighted portfolios have higher excess returns and higher Sharpe ratios than the other fundamental value–weighted portfolios, including the dividend-weighted portfolio. The repurchase-weighted portfolio shows a positive and statistically significant alpha of 2.77% after controlling for the Fama–French factors (market, size, and book-to-market) and Carhart’s momentum variable. The total payout–weighted portfolio also has a positive and significant alpha, albeit smaller than that of the repurchase-weighted portfolio. <b>TOPICS:</b>Portfolio construction, security analysis and valuation

Portfolios Weighted by Repurchase and Total Payout

This paper examines three portfolios weighted by fundamental measures of firm size: share repurchases, total payout, and earnings retention. We find that the repurchase weighted and the total payout weighted portfolios have higher excess returns and higher Sharpe ratios than the most common fundamental weighted portfolio (namely, the dividend weighted portfolio). The repurchase weighted portfolio shows a positive and statistically significant alpha of 2.77% after controlling for the Fama-French factors (of market, size, book-to-market), and Carhart's momentum variable. The total payout weighted portfolio also has a positive and significant alpha, albeit smaller than that of the repurchase weighted portfolio.

Dual Class IPOs ARE Underpriced Less Severely

AbstractWe analyze a sample of dual and single class initial public offerings (IPOs) to investigate whether empirical estimates of underpricing determinants are consistent across alternative measures of firm size and alternative techniques intended to account for underwriter price stabilization efforts. We find that results from long‐standing methods for estimating underpricing relations are generally robust to one's choice of size proxy and are consistent with estimates obtained from censored regressions of first‐day returns and from least squares regressions of longer horizon initial returns. We also confirm an existing finding in the literature that dual class IPOs endure less underpricing than do single class firms.

Capital Structure in Small Manufacturing Firms: Evidence from the Data

This article examines theories of capital structure pertaining to small firms and looks at the capital structure of small to mid-sized manufacturing firms within the context of those theories. Results provide support for Leland and Pyle's (1977) Signaling Theory, Myer's (1984) Pecking Order Theory, Berger and Udell's (1998) Life Cycle Theory. Contrary to the findings of prior research, these results revealed that industry sector was not a significant determinant of capital structure. Rather, these findings show that capital structure in small to mid-sized firms is determined by measures of firm size, firm age, organizational status, profitability, and asset structure.

Mobile Phone Mergers and Market Shares Short Term Losses and Long Term Gains

The US mobile phone industry has dramatically consolidated through mergers. We investigate whether a merger increases the performance of a combined carrier over the sum of its constituent parts. We first directly compare the quantities of post-merger carriers to those of their pre-merger predecessors. This analysis considers only two years after a merger, as most carriers engage in new mergers after that time. To examine possible long run implications, we also explore the cross sectional relationship between outcomes and measures of firm size, as firm size is increased in a merger. We examine the market share of new subscribers. We also examine two measures of firm size: the amount of a carrier's geographic coverage and its past subscriber count.

Size Perusahaan dan Profitabilitas: Kajian Empiris Terhadap Perusahaan Manufaktur yang Terdaftar di Bursa Efek Jakarta

This research examines the relationship between profitability and size of manufac¬turing companies for the period of 2000 to 2003. Two measures of profitability are em¬ployed: Earnings before interest, taxes, depreciation and amortization (EBITDA margin); and earnings before interest and taxes (EBIT margin). The measure of firm size is the num¬ber of employees. The results are consistent with theories of firm size that specify trade-offs between economies of scale and organizational costs and with theories that ascribe certain competencies to firms that allow them to offset the advantages often ascribed to large firms such as economies of scale. Key Words:   Size, Profitabily, Economy of Scale, Organisational, Competency, and Critical resources

Firm Size, Industry Mix and the Regional Transmission of Monetary Policy in Germany

AbstractThis paper estimates the impact of interest rate shocks on regional output in Germany over the period from 1970 to 2000. We use a vector autoregression (VAR) model to obtain impulse responses, which reveal differences in the output responses to monetary policy shocks across ten German provinces. Next, we investigate whether these differences can be related to structural features of the regional economies, such as industry mix, firm size, bank size and openness. An additional analysis of the volatility of real GDP growth for the period 1992-2000 includes the Eastern provinces. We also present evidence on the interrelationship between firm size and industry, and compare our measure of firm size with those used in previous studies. We conclude that the differential regional effects of monetary policy are related to industrial composition, but not to firm size or bank size.

Firm Size, Employees and Profitability in U.S. Manufacturing Industries

We examine the relation between profitability and size for sixty-four manufacturing industries between 1990 and 2001. We use three measures of profitability: Earnings before interest, taxes, depreciation and amortization as a percent of sales (EBITDA margin); earnings before interest and taxes as a percent of sales (EBIT margin) and EBIT as a percent of total assets (EBIT/TA). Our measure of firm size is the natural log of the number of employees. We find the following: (1) In about half of the sixty-four industries firm profitability increases at a decreasing rate and eventually declines as firms become larger. (2) For the remaining half of our manufacturing industries, no relationship exists between size and profitability. (3) For a given level of total assets, firms with fewer employees exhibit greater profitability. (4) For a given level of sales, firms with fewer employees exhibit greater profitability. Our results are consistent with theories of firm size that specify trade-offs between economies of scale and organizational costs and with theories that ascribe certain competencies to firms that allow them to offset the advantages often ascribed to large firms such as economies of scale.

Do share prices matter?

This paper examines whether the cross sectional variation in Australian share prices is partially explained by measures of firm size and ownership characteristics in a manner that is consistent with firms behaving in accordance with Merton’s (1987) model of capital market equilibrium with incomplete information. Based on a sample of firms whose shares were traded on the ASX during 1995, we show that firms largely owned by less wealthy shareholders tend to have low stock prices, although this relation is not linear. In addition, larger, better–known, firms tend to have higher stock prices. These findings are consistent with prior evidence from US markets, and suggest the existence of a shareholder clientele effect in Australia that is related to the share price of the underlying firm.

Determinants of growth and profitability in small entrepreneurial firms

Using accounts data for a sample of 38 small manufacturing firms located in Tayside Region, this paper investigates the relationship between company characteristics including size, age, location and industry group, and profitability and growth. The trade‐off between the possibly conflicting objectives of profit and growth is considered primarily from the entrepreneurial rather than the managerial standpoint which previous econometric studies of small firm performance have concentrated on. Motivations for undertaking entrepreneurial activity and their possible relationships with profitability and growth are discussed and a number of hypotheses developed. From this perspective it is argued that a firm size measure based on employment is more appropriate than one based on sales or assets which previous studies have used. Firm characteristics are found to be of limited value in explaining profitability. However, larger firms are found to grow faster than smaller, and younger firms are found to grow faster than older. This is also some evidence that growth is stronger in urban than in suburban or rural locations. It is possible that entrepreneurial motivations are an important factor in this regard and it is suggested that future econometric studies of small firm performance take these into account.