Size, Growth, Profits, and Executive Compensation in the Large Corporation: A Study of the 500 Largest United Kingdom and United States Industrial Corporations

By David J. Smyth; William J. Boyes | Go to book overview

2 Alternative Measures of
Firm Size:

Some Theoretical
Considerations

I INTRODUCTION

Much of the empirical work in industrial economics and in microeconomics involves the use of measures of firm size. Measures often adopted are sales, total assets, net assets, equity and employment. At times theoretical considerations make it clear which measure is appropriate but the measure may not be available. For instance, prior to the Companies Act of 1967, U.K. companies were not obliged to publish sales figures and most of them did not. Thus any researcher wishing to undertake empirical work using sales as his measure of firm size was faced with the problem that his sample size would be much smaller than if he used a more readily available measure such as net assets. Further, if he used sales his sample was likely to be a biased one, for in any year, one might expect the more successful companies to be the ones to publish sales. Consequently researchers have tended to use whichever measure of firm size was conveniently available. For this there were thought to be two justifications. First, that it was often not clear which measure was most desirable on theoretical grounds. Secondly, following Hart and Prais ( 1956) and Bates ( 1965), it was known that alternative measures of firm size were highly correlated and it was thought that this provided a sufficient condition for the interchangeability of alternative measures, i.e. that results obtained would be independent of the particular measure of firm size used. * It is in this sense that we use 'interchangeability' in this book. We shall demonstrate that, for alternative measures of firm size to be interchangeable, more rigorous

____________________
*
Studies that used this justification included some by one of the present authors — Samuels and Smyth ( 1968, p. 128) and Smyth, Samuels and Tzoannos ( 1972, p. 78).

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