Abstract:
The purpose of this paper is to analyze whether firm size effects leverage and profitability for a sample of 958 firms, for the period 2004-2013. Firms belong to the construction sector and are from eight western and eastern countries. Firm’s size is measured by two variables: number of employees and logarithm of sales. Leverage is measured as current liabilities divided by total assets and non-current liabilities divided by total assets. Profitability is measured by return on assets and profit margin. Results emphasised that firms have used more debt than equity. Firms on average are profitable, but medium firms are more profitable than large firms. Larger firms used more, both short-term and long-term liabilities, than medium firms. Thus, larger firms have used more debt and are less profitable than medium firms. A negative relationship is found between leverage and profitability, and this is in line with pecking order theory. A positive relationship is found between leverage and firm size and this in line with trade-off theory.
