Academic journal article International Journal of Business and Society

Does Organizational Growth Contribute to Profitability? Evidence from Malaysian Public Listed Companies

Academic journal article International Journal of Business and Society

Does Organizational Growth Contribute to Profitability? Evidence from Malaysian Public Listed Companies

Article excerpt

ABSTRACT

This paper aims to examine the impact of organizational growth on the profitability of Malaysian public listed companies for the period of 2001-2010. The sample consists of a balanced panel data of 240 companies from various sectors listed on the Main Board of Bursa Malaysia. The study develops multiple regression models to test the impact of organizational growth on firm performance. The results reveal that organizational growth has an impact on profitability. Two independent variables, viz. total assets growth and fixed assets growth, are found to be significantly affecting the performance of our sample firms. These findings may reveal that Malaysian public listed firms should particularly focus on total assets growth and fixed assets growth to maximize their returns.

Keywords: Organizational Growth; Profitability; Malaysian Public Listed Firms.

1. INTRODUCTION

Firm growth is critical to the economy development, especially for developing country (Sanghamitra, 1995). Malaysia is widely recognized as an emerging market and has been promoted from Secondary Emerging market status to Advanced Emerging market status in June 2011 (FTSE, 2010). During 2001 to 2008, Malaysia recorded annual average economic growth rate of 5% and she appears to be a consistent performer in the ASEAN region (Datamonitor, 2010). Moreover, the Malaysian economy shows strong sign of recovery in 2010 after the global economic crisis as a result of strong growth in exports and imports; it is expected that the industrial production growth will persist in the future (Datamonitor, 2010). Turning to the micro perspective, the asset growth rates for Malaysian companies reported in Watanabe, Xu, Yao, and Yu (2011) is approximately 8 %, which is well above the average of all international firms of 6.8%. The profitability persistency of individual firms in seven developing nations including Malaysia is proven to be lower than that of other developed countries, which suggests higher intensity of competition (Glen, Lee, and Singh, 2003). To remain competitive and to ensure sustainable profitability, firms should thus grow at a stable pace as there is a widespread presumption that firm growth is closely linked to profitability (Jang and Park, 2011).

Growth process, however, is non-stationary (Sanghamitra, 1995) and the variability of growth rate is high and unpredictable (Geroski, Machin, and Walters, 1997). Despite the fact that growth is highly unpredictable, firm can achieve growth through different ways so one single growth indicator is unable to measure multidimensional growth (Delmar, Davidsson, and Gartner, 2003). This reason is the first motivating factor of this study to employ four different growth measures, namely sales growth, total asset growth, fixed asset growth, and employment growth to examine the impact of organizational growth (Delmar et al., 2003) on firm performance. The second motivating factor is that the research on the relationship between organizational growth and the profitability of Malaysian public listed firms is less voluminous. We seek to provide empirical evidence on this part. Our research question is relevant to management who may be interested in knowing the benefits of different types of growth. The findings of this study may provide some insights to management in steering the corporate growth strategies of firms.

The rest of this paper is organized as follows. Section 2 reviews the prior literatures. Section 3 presents the data and methodology, while Section 4 shows the empirical findings and discussion. Finally, conclusion and recommendation are presented in Section 5.

2. LITERATURE REVIEW

The empirical evidence on the impact of growth and firm performance is very limited and there is no specific pattern of relationship between growth and firm performance from prior studies.

The study of the relationship between growth and firm performance dates back to the study done by Gupta (1969), which focuses on the effects of growth on various financial ratios including profitability ratios. …

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