Profitability determinants among micro firms: evidence from Swedish data

Purpose – The purpose of this paper is to investigate the variables affecting firm profitability, applying the seemingly unrelated regression method to a large sample of approximately 87,000 observations covering 12,530 non‐financial micro firms operating in four industry sectors, from 2006 to 2007. Design/methodology/approach – The study considers profitability determinants at the firm as well as industry affiliation levels in examining hypotheses developed from resource‐based approaches. Seemingly unrelated regression (SUR) was used to detect the combination of variables that best estimated the impact of the explanatory variables on the dependent variable. Findings – The findings indicate that while firm size, lagged profitability, growth, and productivity positively influence profitability, firm age and industry affiliation negatively influence it. The empirical results suggest that productivity is the most significant determinant of profitability. These results are fairly robust across the various industry sectors covered in the study and are largely consistent with the hypotheses developed from the resource‐based approach. Research limitations/implications – The current study addresses an issue that is relevant to various stakeholders, including managers, investors, and debtholders, and may facilitate further research in similar areas of small business studies. Practical implications – The question of what factors determine profitability should accordingly be one of high priority for both researchers and practitioners, including managers, investors, debt holders, and policy makers. Originality/value – Most of previous studies of profitability determinants were actually performed in the industrial organization discipline. This study examines the impact of internal determinants including firm size, age, and sector on firm profitability from a managerial perspective. Unlike the other approaches, this approach suggests that firm performance is mainly determined by internal rather than external variables.