Title: The use of financial data to monitor competing models of firm growth

Authors: Tarek Ibrahim Eldomiaty; Mohamed Hashem Rashwan

Addresses: Faculty of Business Administration, Economics and Political Science, British University in Egypt, P.O. Box 43, 11837, Cairo, Egypt ' Institute for Islamic World Studies, Zayed University, P.O. Box 144534, Abu Dhabi, United Arab Emirates

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.

Keywords: firm growth theory; Z-score models; DJIA; sales ratios; cost ratios; financial data; firm growth models; sales revenue; cost savings; fixed assets.

DOI: 10.1504/IJEBR.2013.054842

International Journal of Economics and Business Research, 2013 Vol.6 No.1, pp.69 - 86

Received: 08 May 2021
Accepted: 12 May 2021

Published online: 09 Jun 2013 *

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