DETERMINANTS OF PROFITABILITY: EVIDENCE FROM POWER AND ENERGY SECTOR

Zeeshan  FAREED; Zahid  ALI; Farrukh  SHAHZAD; Muhammad Imran  NAZIR; Assad  ULLAH

Authors

Zeeshan FAREED Zhongnan University of Economics and Law, China. Email: zeeshanfareed@hotmail.com. https://orcid.org/0000-0003-1971-8867
Zahid ALI Zhongnan University of Economics and Law, China. Corresponding author: zeeshanfareed@hotmail.com.
Farrukh SHAHZAD Chongqing University of Petrochemical Technology, Maoming, Guangdong, China. Corresponding author: zeeshanfareed@hotmail.com.
Muhammad Imran NAZIR Zhongnan University of Economics and Law, China. Corresponding author: zeeshanfareed@hotmail.com. https://orcid.org/0000-0002-4295-7578
Assad ULLAH Researcher PhD, Henan University, Huazhong University of Science and Technology, China. Email: assad@henu.edu.cn. https://orcid.org/0000-0001-5365-0224

Keywords:

Profitability, Firm size, Firm growth, Leverage, Firm age, Productivity, Electricity crisis

Abstract

https://doi.org/10.1515/subboec-2016-0005

The study examines the impact of key determinants of profitability of power and energy sector in Pakistan such as firm size, firm age, firm growth, productivity, financial leverage and electricity crisis discussed in the broader inter-disciplinary literature. For this purpose panel data of 16 firms of power and energy sector is taken for 2001 to 2012. The study considers profitability determinants at the firm as well as industry affiliation levels in examining hypotheses developed from resource-based approaches. Random effect model is used to detect the combination of variables that best estimated the impact of the explanatory variables on the dependent variable. The empirical results suggest that firm size, firm growth, and electricity crisis positively impact the profitability. However, firm age, financial leverage and productivity negatively influence the firm profitability. This study also propose that during the electricity crisis the profitability of power sector is increased even production of this sector is very low. The findings further indicate that larger and younger firms with high growth and low productivity are more likely to be profitable. This study has found that firm productivity and firm size are the strongest determinants of profitability in power and energy sector of Pakistan.

JEL classification: F65, G23

References

Amit, R., & Schoemaker, P. (1993). Strategic assets and organizational rent. Strategic Management Journal, 14(01), 33-46.

Asimakopoulos, I., Samitas, A., & Papadogonas, T. (2009). Firm-specific and economy wide determinants of firm profitability: Greek evidence using panel data. Managerial Finance, 35(11), 930-939.

Autio, E. (2005). Creative tension: the significance of Ben Oviatt’s and Patricia McDougall’s article ‘Toward a theory of international new ventures'. Journal of International Business Studies, 36(01), 9-19.

Baltagi, B. H. (2005). Econometric Analysis of Panel Data (3rd edition). John Wiley and Sons, Ltd.

Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of, 17(01), 99-120.

Barney, J. (2001). Resources-based theories of competitive advantage: A ten-year retrospective on the resource based view. Journal of Management, 27(6), 643-650.

Bothwel, J. L., Cooley, T. F., & Hall, T. E. (1984). A new view of the market structure–performance debate. The Journal of Industrial Economics, 397-417.

Claver, E., Molina, J., & Tari, J. (2002). Firm and industry effects on firm profitability: a Spanish empirical analysis. European Management Journal, 20(3), 321-328.

Coad, A. (2007). Firm growth: a survey. No. 2007-03, Papers on Economics & Evolution available at: http://ideas.repec.org/p/mse/cesdoc/r07024.html (accessed 2 August 2011).

Curran, J. J., Blackburn, R. A., & Black, S. (1993). Networks and small firms: constructs, methodological strategies and some findings. International Small Business Journal, 11(02), 13-24.

Dhawan, R. (2001). Firm size and productivity differential: theory and evidence from a panel of US firms. Journal of Economic Behavior & Organization, 44(03), 269-93.

Eriksen, B., & Knudren, T. (2003). Industry and firm level interaction implications for profitability. Journal of Business Research, 56(3), 191-199.

Fenny, S., & Rogers, M. (1999). The performance of large private Australian enterprises. Working Paper No. 2/99, Melbourne Institute of Applied Economics and Social Research, University of Melbourne, Melbourne.

Fitzsimmons, J. R., Steffens, P. R., & Douglas, E. J. (2005). Growth and profitability in small and medium sized Australian firms. Proceedings of AGSE Entrepreneurship Exchange, Melbourne, February, available at: http://ssrn.com/abstract¼1263734 (accessed 12 August 2011).

García-Herrero, A., Gavilá, S., & Santabárbara, D. (2009). What Explains the Low Profitability of Chinies Banks. BANCO DE ESPAÑA, Madrid, 1-34.

Geroski, P. A., Machin, S. J., & Walters, C. F. (1997). Corporate growth and profitability. Journal of Industrial Economics, 45(02), 171-189.

Gschwandtner, A. (2005). Profit persistence in the ‘very’ long run: evidence from survivors and exiters. Applied Economics, 37(07), 793-806.

Gujarati, D. N. (1988). Basic Econometrics second edition. New York: McGraw- Hill.

Hawari , M., & Ward, T. (2006). The effect of automated service quality on Australian bank financial performance and the mediating role of customer satisfaction. Marketing Intelligence and Planning, 24(2), 127-147.

Hussain, I., & Javed, N. (2012). Energy Crisis and Profitability of Listed Food Producers in Pakistan. Journal of Business & Economics, 4(2), 236-255.

Ito, K., & Fukao, K. (2008). Determinants of the profitability of the Japanese manufacturing affiliates in China and regions: does localization of procurement, sales and management matter. Discussion Paper Series No. 01-E-001, RIETE, available at: http://ideas.repec.org/p/eti/dpaper/07001.html.

Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management incentives. Journal of Political Economy, 98(01), 225-264.

Jovanovic, B. (1982). Selection and the evolution of industry. Econometrica, 50(3), 649-70.

Liu, Y., & Hung, J. (2006). Services and the long term profitability in Taiwan's Banking. Gloabal Finance Journal, 17, 177-191.

Love, J., Roper, S., & Du, J. (2009). Innovation, Ownership and Profitability. International Journal of Industrial Organization, 27, 424-436.

Mahoney, J., & Pandian, J. (1992). The resource-based view within the conversation of strategic management . Strategic Management Journal, 13(05), 363-80.

Markman, G. D., & Gartner, W. B. (2002). Is extraordinary growth profitable? A study of inc. 500 high-growth companies. Journal of Entrepreneurship: Theory and Practice, 27(1), 65-75.

Nunes, P. M., Serrasqueiro, Z. M., & Sequeira, T. N. (2009). Profitability in Portuguese service industries: a panel data approach. The Service Industries Journal, 29(05), 693-707.

Park, K., & Weber, W. (2006). Profitbaility of Korean Banks: Test of Market Structure Versus Efficient Structure. Journal of Economics and Business, 58, 222-239.

Peteraf, M. (1993). The cornerstones of competitive advantage: a resource-based view. Management Journal Strategic, 14(01), 179-91.

Pi, L., & Timme, S. (1993). Corporate control and bank efficiency. Journal of Banking and Finance, 17(2-3), 515-30.

Porter, M. (1991). Towards a dynamic theory of strategy. Strategic Management Journal, 12, 95-117.

Qian, G. (2002). Multinationality, Product Diversification, and Profitability of Emerging US small and medium-sized enterprises. Journal of Business Venturing, 17, 611-633.

Qureshi, M. A. (2009). Does pecking order theory explain leverage behaviour in Pakistan? Applied Financial Economics, 19(17), 1365-1370.

Samiloglu, F., & Demirgunes, K. (2008). The effect of working capital management on firm profitability: evidence from Turkey. The International Journal of Applied Economics and Finance, 02(01), 44-50.

Shah, B., Essrani, S. D., Shah, N., & Rahat, N. (2013). The Impact of Energy Crises on the Textile Sector of Pakistan (2005-2010). Journal of Emerging Issues in Economics, Finance and Banking, 1(5), 401-413.

Sheikh, N. A., & Wang, Z. (2011). Determinants of capital structure: an empirical study of firms in manufacturing industry of Pakistan. Managerial Finance, 37(2), 117-133.

Slater, S., & Olson, E. (2001). A fresh look at industry and market analysis. Business Horizons, 15(1), 15-22.

Spanos, Y., Zaralis, G., & Lioukas, S. (2004). Strategy and Industry Effects on Profitability: Evidence from Greece. Strategic Managment Journal, 25(2), 139-165.

Stierwald, A. (2010). Determinants of Profitability: An Analysis of Large Australian Firms. Melbourne Institute Working Paper Series, 10(3), 1-34.

Sufian, F., & Parman, S. (2009). Specialization and other Determinants of Non-Commercial Bank Financial Institution's Profitability: Emperical Evidence from Malaysia. Strategic Managment Journal, 26(2), 113-128.

Tan, Y., & Floros, C. (2012). Bank profitability and inflation: the case of China. Journal of Economic Studies, 39(06), 675-696.

Victoria, B. C. (2013, May 2). Good Old R-Squared! . Retrieved 05 01, 2014, from Econometrics Beat: Dave Giles' Blog: http://davegiles.blogspot.com/2013/05/good-old-r-squared.html.

Weisbord, E. S. (1994). Growth strategy in corporate law firms: internal influences and performance outcomes. Journal of Managerial Issues, 06(03), 350-365.

Wernerfelt, B. (1984). A resource-based view of the firm. Strategic Management Journal, 05(01), 171-180.

Yazdanfar, D. (2013). Profitability determinants among micro firms: evidence from Swedish data. International Journal of Managerial Finance, 09(02), 150-160.