Firm Size–Profitability Nexus: An Empirical Evidence from Nigerian Listed Financial Firms

Studies on the nexus between size and profitability occupy a substantial portion of empirical economic literature; however, the existing literature tilt much in favour of non-financial firms with little attention towards the financial sector, especially in the context of developing countries, most especially, Nigeria. This study examines the causality between size and profitability among 45 financial listed firms in Nigeria using the innovative and recently developed panel vector autoregressive (PVAR) and two-step system generalized method of moments (GMM) in order to resolve the inherent problems of endogeneity and persistence. The results emanating from the study show that there exists a bidirectional causal relationship between size and profitability in the Nigerian financial industry; hence, past profitability has brought about the present size level and past size of the industry has led also to the present profitability level. Consequently, firm size is a strong policy option for corporate managers in the Nigerian financial industry for achieving optimal profitability and vice versa.