The Relationship Between Firm Size and Profitability for Listed Companies in Hong Kong

Please help to prepare the dissertation according to the dissertation outline, all requirements and scope are in it.

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

Initial Literature Review

Most studies measuring the impact of company size on profitability have found a positive relationship between company size and profitability. Serrasqueiro and Nunes (2008) through comparing small and large-sized companies in Portugal to investigate this relationship. It showed a positive correlation in the five-year data from 1999 to 2003. Shubita and Alsawalhah (2012) through examining the effect of capital structure from 2004 to 2009 to study the relationship of Jordanian industry, and the results show that the size of company has an impact on sales growth and profitability.

Gupta’s 1969 study, the most important early work on this relationship, showed that firm size affects capital structure decisions and evaluates the profitability of firms in unique ways. Whereas Dogan summarized most of the findings on this relationship in 2013, investigating the relationship and discovering a positive association between the two variables. Therefore, further exploration of the relationship with robust proofs from distinct datasets is necessary. Studies of this relationship in different countries have had mixed results.

(Hall and Weiss, 1967) pointed out that the basic proposition of economic theory is that the profit rates of all firms tend to be equal under perfect competition. However, under imperfect market conditions, an important factor in generating profits is the size of the company. Thus, early business economics theory has demonstrated the role of economies of scale (Alexander, 1949; Stekler, 1964; Hall and Weiss, 1967; Scherer, 1973) and other technical and economic efficiencies related to large commercial companies.

Baumol (1959) assumed a positive relationship between firm size and firm profitability. He shows that, at least to a certain extent, increasing money capital will not only increases the firm’s overall profits, but that since it places the company in a higher level of the capital group that is not perfectly competitive, it will likely increase its earnings even in the long run. U.S. dollar investment”. Therefore, he believes that large companies are able to increase investment opportunities, resulting in greater profit margins, but small companies cannot due to financial difficulties.

Also, because large companies can enter multiple product lines, this gives them here comes the benefits of company size. As a result, large companies are able to take advantage of money economies of scale and technology in manufacturing, regulation, marketing and raising capital, and large companies have an advantage over smaller companies.

Theories supporting scale include agency theory and capital demand theory. Disclosure costs, such as the cost of collecting and disseminating information, are higher for small firms (Lang and Lundholm, 1993). Smaller firms may not have access to the resources needed to aggregate and present extensive information (Buzby, 1975). However, this argument may not be true in all cases, especially given the rapid development of information technology systems.

According to Farahnaz Orojali Zadeh and Alireza Eskandari (2012), organizational theory is further divided into sub-sections, contract costs, namely transaction and firm hierarchy. These theories found in the economic literature focus on the types of transaction costs that exist in markets and within firms, one of the main criteria here being the size of the firm.

On the other hand, there are some studies showing to the contrary that there is no relationship between company size and profitability. Becker-Blease et al. (2012) investigated this relationship by studying U.S. manufacturing and found that the relationship is industry-specific, since there is an inverse relationship between firm performance and size in large U.S. manufacturing. Banchuenvit (2012) found that there is a negative relationship between the company size of listed companies in Vietnam and ROA. Furthermore, the findings show that J. Aloy Niresh & T. Velnampy (2014) stated that there is no indicative relationship between firm size and the profitability of listed manufacturing firms.

Research Methods

Research will be conducted through secondary data collection. Secondary data will be analyzed by Hong Kong-listed companies listed on the HSCI (Hang Seng Composite Index) and any related data published by these listed companies. Economy of scale, organization theory and agency theory will be used to analyze how firm size affects firm profitability.

We will use return on assets to determine the profitability of Hong Kong-listed companies. As for the size of the company, it depends on the company and various production operations capabilities while providing products and service, so we will use total assets to measure company size. In this study, we will categorize the Hong Kong-listed companies into five industries, and then select ten companies from each industry for analysis. Secondary data comes from the audited annual reports of the companies in the study, data was collected over a two-year period. For empirical analysis purposes, multiple regression and correlation methods with SPSS and WSCC system will be used.

Hypotheses:

H1: Company size affects corporate profitability of Hong Kong-listed companies

H2: Significant relationship between firm size and profitability of a firm

The independent variable is the variable representing the size of the company. In this study, total sales and total assets will be used as indicators of company size. Whereas, return on assets and net profit margin are two dependent variables used to measure a company’s profitability. To address the multicollinearity problem, we employ two models:

Timeline of Dissertation

Week 1 Collect relevant background materials

Week 2 Draft introduction section

Week 3 Identify research objectives and aims

Week 4 Draft research objectives and aims

Week 5 Literature and articles review – Relationship Between Firm Size and Profitability

Week 6 Literature and articles review – The Effect of Size, Growth, and Industry on the Financial Structure of Manufacturing Companies.

Week 7 Literature and articles review – Performance and size

Week 8 Literature and articles review – The Effect of Firm Size on Firms Profitability

Week 9 Literature and articles review – The Relationship Between Profitability and Firm Value

Week 10 Draft literature review section

Week 11 Review research method through reading academic literature

Week 12 Confirm research method

Week 13 Draft research methods section

Week 14 Theory review – Economy of scale

Week 15 Theory review – Agency theory

Week 16 Expound the theories

Week 17 – 19 Review the annual report of those listed-companies for a two-year period

Week 20 Organize information

Week 21 Data analysis

Week 22 Draft conclusion and section

Week 23 Organize the reference list

Week 24 Proofreading

Week 25 Corrections to drafts based on supervisor comments

Week 26 Second proofreading

Week 27 Submit final dissertation