Industry and size effects in corporate financial ratios: evidence from the EU countries

The paper deals with the problem of how firm size and industry impact on the corporate performance reflected in financial ratios. The main aim of the research is to establish the relative importance of the industry and size effect in their influence on corporate performance in the selected European Union countries. It has been shown in a number of studies from this area that small enterprises differ from large ones in many aspects. Corporate diversity has also been observed depending on the industry. However, the majority of the hitherto analyses focuses mainly on corporate results reflected only in their stock returns. This paper is one of the few attempts to compare the intensity with which the industry and size factors affect fundamental financial ratios. The study covers three groups of firms: small, medium and large ones in thirteen industries and in ten EU countries, including Poland in the 1999-2007 period. The variables, i.e. yearly financial ratios of profitability, liquidity and solvency, were computed with the use of the aggregated financial statements published in the European BACH database. The methods employed in the study involve one-way analysis of variance and cluster analysis. The findings provide empirical evidence that, in most of the countries analysed, the industry factors dominate over the size effect. This, in turn, implies that the diversification strategies based on cross-industry sections should prove more effective than those based on cross-size sections.