Profitability Effects of Firm Size: Evidence from Fast-Growing SMEs in Bulgaria

Does firm size matter for the performance of small and medium-sized companies? To answer this question, the study at hand employs data from the well-established Gepard ranking of small and medium-sized fast-growing enterprises in Bulgaria. Ordinarily least-squared regressions techniques are applied on a cross-section of more than 2000 observations with the results showing that returns on revenue are negatively related to firm size in our sample. Additional regressions show that sectoral effects are quite strong and explain a non-trivial part of the variation in profitability. Although significant, regional effects are not that strong. Specifically, our results show that firms in the northern regions are more profitable than firms in the southern regions. Overall, the results are in favor of the hypothesis that firms in the sample follow a growth-focused strategy rather than a profit-focused strategy. The study contributes to the ongoing discussion on the size-growth-profitability nexus by providing evidence from a less researched area of small and medium enterprises in South-East Europe, particularly in Bulgaria.