The impact of legal form change on profitability: The case of companies in the Republic of Serbia

The paper aims to examine whether and in what direction and extent the companies' profitability changes after their legal form transformation. The research includes 71 companies that changed their legal form between 2013 and 2021 in the developing and transition economy of the Republic of Serbia and relies on hand-collected data from the financial statements for the year of legal form transformation and the next two years. All observed companies transformed from a stock company into a limited liability company. The profitability is measured by return on equity and return on total assets. Generally, we find that the profitability at the sample level increased in the year after legal form transformation, but decreased in the following year. However, those changes in profitability are not statistically significant. Additional analysis based on the sample disaggregation from the aspects of company size and activity reveals some statistically significant differences, which indicates that the changes in the profitability indicators but also their determinants after the legal form transformation are not the same for all kinds of companies. The increase in the profitability of total assets is most pronounced in medium-sized companies and is also detected in production companies. The research results may be useful for owners and managers who consider a change in the legal form of their companies, but also financial analysts and theorists and practitioners in the field of financial accounting and reporting and business finance.