Exploring the nonlinear effect of size on profitability: evidence from an insurance brokerage industry in an emerging market

Abstract

PurposeThis study examines the possible nonlinear effect of size on stakeholder and shareholder profitability in the Ghanaian insurance brokerage industry.Design/methodology/approachThis study employs a panel dataset of 64 Ghanaian insurance brokerage firms spanning 2011–2015. Static [ordinary least squares (OLS), fixed effect and random effect and dynamic (two-step generalized method of moments (GMM))] estimation techniques are employed to analyze the data.FindingsThe study finds the existence of both economies and diseconomies of scale and scope theories in the Ghanaian insurance brokerage industry confirming the existence of nonlinear nexus between size and performance. This finding is consistent for both stakeholder and shareholder profit performance. Thus, the results show that size improves profitability of insurance brokerage firms, but beyond a certain threshold, the relationship turns negative as size negatively affects profitability.Practical implicationsThe research findings have implications for both policy and research; the study recommends that Ghanaian brokerage managers should understand that not all growth is good and exercise a duty of care when applying growth strategies by monitoring size effect on performance so as not to go beyond the inflection point. Further research can be done to examine this effect in other contexts, timeframes and jurisdictions.Originality/valueThis research is unique in that it employs a panel dataset consisting of 96% of insurance brokerage firms in Ghana whilst employing both static and nonstatic regression models to examine the effect of size. The research analysis adopted is robust, and the findings are significant. Also, the lack of empirical studies on the operations and dealings of auxiliary institutions such as the insurance brokerage firms adds value to this research.

Firm Performance Indicators as a Fundamental Analysis of Stocks and a Determinant of a Firm’s Operation

“…Likewise, the positive relationship between SIZE and ROE-which represents a percentage rise in SIZE is associated with about a 0.833 percent increase in ROE. The result also supports the previous findings of Kotey et al (2021), who confirm that firm size increments Firm Performance Indicators as a Fundamental Analysis of Stocks and a Determinant of a Firm's Operation 204 positively affect stakeholder and firm performance. This finding was also confirmed by Ayaz et al (2021).…”

“…Firstly, factor that determine profitability (firm's performance) is firm size (Akotey et al, 2013;Kotey et al, 2021). According to the results of Liargovas and Skandalis (2010), financial leverage, firm size, liquidity ratio and operational ability have a significant impact on a firm's competitiveness, which can be measured using three variables: ROA, ROE and sales.…”

“…The results show that a firm's profitability in terms of ROE and EPS has a positive and significant relationship with its sustainability; it retains the current shareholders and encourages future shareholders to invest in the company. In addition, Kotey et al (2021) indicate that the size increments of insurance brokerage firms positively affect the profit of stakeholders in the short term.…”

“…Therefore, B/M ratio is a robust indicator to determine firm operation and performance. One of the main indicators relating to asset management is SIZE (Kotey et al, 2021;Bodhanwala and Bodhanwala, 2018), which has a strongly positive impact on firm performance, especially on the ROE of all of the quantiles of companies. Interestingly, SIZE has a substantially negative relationship with EPS, particularly in companies with low and high EPS.…”

Do business strategies vary across firms in the banking industry? New perspectives from the bank size–profitability nexus

“…Empirically, extant studies have identified a two‐way relationship between bank size and profitability (Akinlo, 2012b; Bolarinwa & Obembe, 2017; Olaniyi, Olayemi, et al, 2017). A more dominant strand in the literature asserts that bank size plays a key and decisive role in driving the profitability and efficiency of listed banks (Kotey et al, 2021). It is conceptualized that increasing bank size can induce an increase in profitability and efficiency by spurring banks to enjoy economies of scale and scope (Shepherd, 1972).…”