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Financial factors and firm growth: evidence from financial data on Taiwanese firms

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  • Khurshid M. Kiani
  • Ellen Huiru Chen
  • Zagros Madjd-Sadjadi

Abstract

We investigate the possible predictability of firm growth in Taiwan using cross-sectional data of financial factors for the years 1997 and 2003 via principal component analysis. Our results reveal that the 18 financial variables (sales growth rate, total assets, total sales, return on assets, return on equity, gross margin, operating cost minus depreciation divided by sales plus other trading income, acid test ratio, debt--equity ratio, time interest earned, average receivables per average daily sales, inventory, average payables per average daily sales, working capital, working capital as a fraction of total assets, long-term liabilities as a fraction of total assets, and sales as a fraction of net worth of the firm) that we employ bunch together into five different financial ratios for the years 1997 and 2003 that are stable between these years. These financial factors are short-term liquidity, return on investment, long-term liquidity, firm size and capital turnover. Regressing these ratio groups (extracted principal components) on firm growth, we find return on investment in the year 1997 was positively and significantly related to firm growth, while long-term solvency was negatively related to firm growth. In addition, smaller firms tended to grow faster. By 2003, larger firms grew faster than smaller ones and short-term liquidity was positively and significantly related to firm growth, while return on investment was no longer a significant determining factor. Our findings suggest that firms that finance internally or do not rely too heavily on indebtedness may end up growing slower during boom periods but they are the ones that survive and outperform after the bust.

Suggested Citation

  • Khurshid M. Kiani & Ellen Huiru Chen & Zagros Madjd-Sadjadi, 2012. "Financial factors and firm growth: evidence from financial data on Taiwanese firms," Quantitative Finance, Taylor & Francis Journals, vol. 12(8), pages 1299-1314, January.
  • Handle: RePEc:taf:quantf:v:12:y:2012:i:8:p:1299-1314
    DOI: 10.1080/14697688.2011.556143
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    References listed on IDEAS

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    1. Manning Mark J, 2003. "Finance Causes Growth: Can We Be So Sure?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-24, December.
    2. Chiattello, Marion L., 1974. "Comment: “On the Use of Principal Components Analysis to Interpret Cross-Sectional Differences among Commercial Banks”," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(06), pages 1047-1051, December.
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    Cited by:

    1. Sorin Gabriel ANTON, 2016. "The Impact Of Leverage On Firm Growth. Empirical Evidence From Romanian Listed Firms," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 18, pages 147-158, December.
    2. Murmann Johann Peter & Korn Jenny & Worch Hagen, 2014. "How Fast Can Firms Grow?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 234(2-3), pages 210-233, April.

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