The effect of combined firm size index on improving corporate profitability models

One of the internal factors of companies affecting their financial structure and profitability, is the firm size. Researchers have used various factors to measure the firm sizes in their research. Every factor has its own disadvantages and benefits; thus, the factors have different interpretations in financial affairs of the companies. By combining different factors, this study tries to propose a new concept of the firm size variable and provide a factor as a replacement for one variable, which includes the benefits of various factors, simultaneously. Different factors of firm size are evaluated in this article using exploratory factor analysis, and a new factor is derived from the principal components method and presented as the firm size variable. In order to investigate the impact of this factor on improving accounting models, its effects on profitability of firms have been tested. To this end, a sample set consisting of ۱۳۹ firms are studied between ۲۰۰۹ and ۲۰۱۹. In this study, ROA and ROE are used as profitability indices. The results show that using factor analysis as an indicator of firm size, improves the profitability results for that firm, and firm profitability is improved, with significant differences, when a factor is used as the firm size index, compared to the case when an index is used for this purpose.

Keywords:

Firm Size , Exploratory Factor Analysis , principal components method , Profitability