A. Based upon the findings reported in Table 10.2, discuss the relation between firm size and profitability, and the link, if any, between firm size and profit rates. In general, does large firm size increase profitability?
B. Using a spreadsheet, sort the DJIA according to profit rates and firm size. Use firm-specific information found on company web sites or investment portals, like Yahoo! Finance or msn Money, to explain the superior profitability of these corporate giants.
C. What other important factors might be included in a more detailed study of the determinants of corporate profitability?
Does large firm size, pure and simple, give rise to economic profits? This question has long been a source of great interest in both business and government, and the basis for lively debate over the years. Economic theory states that large relative firm size within a given economic market gives rise to the potential for above-normal profits. However, economic theory makes no prediction at all about a link between large firm size, pure and simple, and the potential for above-normal profits. By itself, it is not clear what economic advantages are gained from large firm size. Pecuniary or money-related economies of large size in the purchase of labor, raw materials, or other inputs are sometimes suggested. For example, some argue that large firms enjoy a comparative advantage in the acquisition of investment funds given their ready access to organized capital markets, like the New York Stock Exchange. Others contend that capital markets are themselves very efficient in the allocation of scarce capital resources and that all firms, both large and small, must offer investors a competitive rate of return in order to grow and prosper.
Still, without a doubt, the profitability effect of large firm size is a matter of significant business and public policy interest. Ranking among the largest corporations in the United States is a matter of significant corporate pride for employees, top executives, and stockholders. Sales and profit levels achieved by such firms are widely reported and commented upon in the business and popular press. At times, congressional leaders have called for legislation that would bar mergers among giant companies on the premise that such combinations create monolithic giants that impair competitive forces. Movements up and down lists of the largest corporations are chronicled, studied, and commented upon. It is perhaps a little known fact that, given the dynamic nature of change in the overall economy, few companies are able to maintain, let alone enhance, their relative position among the largest corporations over a 5 to 10year period. With an annual attrition rate of 6% to 10% among the 500 largest corporations, it indeed appears to be “slippery” at the top.