How firm size shapes profitability in Nigerian banking and manufacturing sectors

Understanding what makes a company profitable has always been at the core of business strategy. A recent study, “Statistical Analysis of the Impact of Firm Size on Profitability,” sheds light on how firm size impacts profitability in Nigeria’s banking and manufacturing sectors, revealing some surprising insights into the role of corporate governance and scale. Conducted over a 20-year period with data from 15 publicly listed companies, this study explores the intricate connections between firm size, board structure, and performance in the unique Nigerian market.

Big Firms: Benefits and Challenges

Larger firms often enjoy economies of scale, allowing them to spread costs over a greater output and gain market power. This scale advantage can lead to greater profitability as companies can negotiate better terms with suppliers and potentially pass savings onto customers. The study found that for Nigerian firms, these benefits generally hold true, especially in terms of Return on Assets (ROA)—a key measure of how effectively a company uses its resources.

However, the study also uncovers potential downsides. As firms grow, they may encounter complexities in management and operations, which can offset the advantages of size. One standout finding reveals that larger boards—common in bigger firms—may actually hinder profitability. The study suggests that as boards grow, decision-making can become less efficient, leading to governance issues that impact firm performance. This insight is particularly relevant to Nigerian firms, where governance structures often differ from global practices.

Why Board Size Matters

One of the study’s most intriguing findings is the negative relationship between board size and profitability. In Nigeria’s banking and manufacturing sectors, companies with larger boards often report lower profits. Experts believe this may be due to slower decision-making or diluted accountability, where too many voices make it challenging to reach effective conclusions quickly. For Nigerian firms, this suggests that bigger isn’t always better—especially when it comes to governance.

This finding provides a practical takeaway: firms should carefully consider their board size to ensure that it aligns with their profitability goals. With a streamlined board, decision-making can become more agile and responsive, potentially improving overall performance.

Leverage and Profitability: A Delicate Balance

The study also examined leverage, or the amount of debt relative to a company’s assets. For Nigerian firms, leverage proved to be a double-edged sword: while higher debt levels can fuel growth and drive profitability, they also increase risk. Companies that effectively balance leverage with sustainable growth initiatives tend to show better profitability indicators, particularly in sectors where capital investment is essential.

Implications for Industry Leaders and Policymakers

This research has critical implications for both industry leaders and policymakers. For corporate leaders, it highlights the importance of efficient governance structures and strategic leverage. It also suggests that expanding a firm’s size—while beneficial in many ways—requires careful consideration of management complexity and governance quality.

For policymakers, these insights underscore the need for policies that promote efficient board structures and responsible leverage practices. As Nigerian firms continue to grow and compete on a global scale, fostering an environment that supports sustainable growth will be key.

Why It Matters

The significance of this study lies in its potential to drive better business practices across Nigeria. For investors, understanding the dynamics between firm size and profitability offers a valuable lens for assessing growth potential in the banking and manufacturing sectors. For Nigerian firms, it provides a clear message: success isn’t just about growing larger; it’s about growing smarter, with a focus on governance and strategic resource management.

In an emerging market like Nigeria, where the economy depends on robust corporate performance, these findings offer a roadmap for creating resilient and profitable businesses. As firms strive for profitability, they must consider both their size and the quality of their management, striking a balance that ensures long-term success in an increasingly competitive landscape.

Author – Tope Kolade Amusa, B.Tech Statistics.

Statistical Analysis scholar specializing in statististical analysis and the application of statistical analysis across healthcare, business, and other key sectors.