Reliability of Size Adjustments in Assessing Business Value: Russian Experience

In this paper, The effect of company size on their profitability is examined. There are a large number of studies on data from foreign markets, where the presence of a premium for size is checked, as well as the causes of this phenomenon. There is no consensus in the scientific community regarding the existence of a size premium in various stock markets. Some researchers suggest that measuring the size of a company using an indicator of market capitalization is incorrect and suggest alternative proxies for this. This study checks whether there is a premium for size in the Russian market and identifies the most suitable size proxies among such indicators as revenue, EBITDA, market capitalization, book value of assets and net assets. In order to get an answer to the tasks, the analysis of panel data is used. Initial analysis revealed a negative correlation between company returns and all five-size indicators. Fixed effect regression showed that all five proxies in general can be used to determine the size of the firm. However, only market capitalization and revenue were selected from this list based on the obtained intra-class correlation coefficient. Subsequently, a size premium was calculated based on these two indicators. Actual results showed that medium-sized companies have a lower premium than largest firms. A similar result contradicts the concept of size effect. Despite of, the fact that the regression model has shown a negative relationship between size and profitability, the premium calculated in practice does not allow us to say with certainty that size fully affects profitability in the Russian market.