Inter-relationship between firm growth and profitability

There is a widespread presumption that there is a close link between firm growth and profitability. However, most of the past studies on firm growth and profitability have been conducted without mutual associations. Only a few studies, thus far, have scrutinized the inter-relationship between firm growth and profitability and the results have been inconsistent. The main reason for this inconsistency is due to the lag structure of the models in each study. To address the issue, this study conducted panel unit-root tests on firm growth and profitability separately and then made appropriate models using dynamic panel system GMM estimators. Through analyzing these models, this study found that in restaurant firms the prior year's profitability had a positive impact on the growth rate of the current year. However, the current and prior year's growth rates had a negative impact on the current year's profitability. This outcome implies that in the restaurant industry profit creates growth but growth impedes profitability. Further implications are also discussed in this paper.

► There is a widespread presumption that there is a close link between firm growth and profitability, but most of the past studies on firm growth and profitability have been conducted without mutual associations.
► This study conducted panel unit-root tests on firm growth and profitability separately and then made appropriate models using dynamic panel system GMM estimators.
► This study found that in restaurant firms the prior year's profitability had a positive impact on the growth rate of the current year, while the current and prior year's growth rates had a negative impact on the current year's profitability.
► The results of this study imply that in the restaurant industry profit creates growth but growth impedes profitability.