Relationship between profitability and growth of the quoted non-financial firms: Evidence from Nigeria

Abstract

Studies on the relationship between firms’ growth and profitability are inconclusive. Most studies in the past do not account for the variation that exist among different sectors in the economy when investigating on the relationship between growth and profitability. This study was conducted to fill this gap by examining the dynamic relationship between growth and profitability in 124 quoted non-financial firms in Nigeria. Specifically, the study examined the relationship across three sectors (manufacturing, services and construction) between the periods 2005 to 2015. The study employed generalized method of moments (GMM). The results of the analyses is mixed: (1) the effect of past profitability on current profitability varies with the sector; negative and significant in the manufacturing; positive but not significant in the services and construction sector. (2) Growth in the previous period impedes current profitability of firms in the manufacturing and services sector, but positively affect profitability of firms in the construction sector. Corporate managers that pursue growth objectives in these two sectors are most likely to be unprofitable. The study recommends that policies (such as subsidies, tariffs, and investment related performance requirement) aimed to enhance growth and profitability of the Nigerian firms, should be selective rather than general.