The Relationship between Firm Size and Profitability: Evidence from Listed Commercial Banks and Insurance Companies in Colombo Stock Exchange in Sri Lanka

Abstract

Firm size isan important determinant in making capital structure decisions of a particularbusiness, as well as it affects the profitability. It is argued that there is apositiverelationship between the firm size and its profitability. This study focuses on therelationship between the firm's size and profitability of the listed commercialbanks andinsurance companies in Colombo Stock Exchange (CSE) in Sri Lanka. The objective of the study is toexplore the effects of firm size on profitability, and to identify the relationship between firm size andthe zrofitability. This paper investigates the relationship between firm size and profitability based on the dataconcerning thirteen (13) listedbanking insurance companies in Sri Lanka during the five year period ranging from 2007 to 2011. The studymeasures the profitability in terms of GrossProfit Margin (GPM), Net Profit Margin (NPM), Return on Assets (ROA) and Return on Capital Employed (ROCE), where as thefirm size is measured in terms of Logof Gross Income (LGI). Based on the analysis of data, the results show the independentvariable LGI, the relationship with NPM is a quite positive significantrelationship than the other negative relationships. But in our selected sample,there are some negative relationships among the independent variables anddependent variables. The impact of LGI onProfitability is very low. Therefore the profitability is in the banking insurance company is influenced not only bythe firm size but also other factorssuch as customer satisfaction, structure of the capital and cost etc.Therefore, the Firm's Size is not animportant determinant in making profitability in the banking and insurance companies. It means that thefinancial managers should make their decisionson profitability and to increase a higher value of a firm thereby maximizing shareholders wealth to a possible maximum level.