The Profitability and Size of Indian Companies:An Empirical Analysis

Using alternative measures of firm size and profitability for an unbalanced panel of 3,437 nonfinancial public and private companies comprising of 10 Indian major industries listed in NSE and BSE from March, 1989 to March, 2009, the present paper first examines the relationship between firm size and profitability and second the relationship between profitability and firm size, degree of vertical integration and level of demand at dis-aggregated and aggregated levels. Applying GLS method, panel fixed effect and random effect models are estimated. All the alternative size measures are found to be significantly and positively, determining the profits at the aggregated level. Rate of return on net fixed assets is found to be the most satisfactory measure of profitability. Evidence showed that the sales as size variable were probably the least subject to measurement bias. Further, evidence confirmed that vertical integration and demand factor positively influenced the profitability. However, results for individual industries varied and the relationship between firm size and profitability cannot be generalized.