Rethinking and Redefining the Determinants of Corporate Profitability

Abstract

Today, the economic scenario has become highly turbulent and competitive, with the companies being exposed to multitude of risks. Increasingly, companies are in a twirl of shrinking profits and diminishing market capitalization. The question as to why some firms succeed while others fail to compete and evolve through chaotic times is today one of the most important issues of organization studies. The present research addresses the value and impact of firm-specific factors on the corporate profitability. It aims at understanding and analyzing the pervasive relationship between the firm-specific factors of firm size, liquidity and capital structure (financial leverage). A sample of 50 Indian companies was selected randomly from the companies listed on Bombay Stock Exchange. Correlation and multiple regression technique were used to analyze the relationship among these firm-specific factors and corporate profitability. Correlation and regression results reveal a significant positive relationship between firm size and corporate profitability. With an increase in the scale of investment, the company’s profits showed an upstream. Capital structure exhibits a significant negative relationship with corporate profitability, consequently with an increase in debt-equity ratio, the company’s profits showed a downstream. However, liquidity had an insignificant negative association with profitability. The value of this research lies in highlighting those specific firm factors that need to be revamped to augment corporate profits. The research has strong implications for industry practitioners. Increasing the scale of the business can act as an added boon to the firm. However, increasing leverage and liquidity to higher degrees may be a big bane. The pervasive relationship that exists between different firm-specific factors and corporate profits highlights the need to revamp, redesign and rebuild the firm size, capital structure and working capital management.