The use of financial data to monitor competing models of firm growth
by Tarek Ibrahim Eldomiaty; Mohamed Hashem Rashwan
International Journal of Economics and Business Research (IJEBR), Vol. 6, No. 1, 2013

Abstract: This paper examines three possible explanations for firm growth: 1) a firm grows according to the growth of sales revenue; 2) a firm grows according to cost savings; 3) a firm grows according to the two factors simultaneously. The paper introduces a new measure for firm growth based on sales-weighted growth of fixed assets. The estimation method uses the properties of the discriminant analysis to build three Z-score models, each of which discriminates low-growth firms from high-growth firms based on: a) sales ratios; b) cost ratios; c) sales and cost ratios together. The results show that the three discriminant models have approximately the same discriminant power (60%). This means that revenue and cost factors are used simultaneously as drivers of firm growth. This result supports the notion that Gibrat's and Viner's theories of firm growth complement each other. The results have practical implications for financial managers regarding the sales and cost factors that are to be considered to promote firm growth.

Online publication date:: Mon, 30-Dec-2013

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