Investigating the Relationship between Growth and Profitability of the Companies Listed in Tehran Stock Exchange Using a Simultaneous Equations System

Document Type : Research Paper

Authors

1 Associate Prof., Shiraz University, Shiraz, Iran

2 Ph.D. Student, Shiraz University, Shiraz, Iran

3 MSc. Student, Shiraz University, Shiraz, Iran

Abstract

There is a duality in studies on the relationship between growth and firm profitability. While some studies have examined the effects of growth on firm profitability, other studies have examined the effects of firm profitability on growth. Reviewing the evidence of the validity of both approaches mentioned above can mean that there is a bilateral (two-sided) relationship between these two variables. In this regard, the goal of present research is to study the bilateral relationship between growth and firm profitability in 173 companies listed in Tehran Stock Exchange (TSE) during 2003 to 2011. First, the bilateral relationship between the two variables was confirmed with Granger causality test and then simultaneous equations system was estimated using two-stage regression. The results express that there is a bilateral relationship between growth and firm profitability of listed companies of TSE. In other words, the results of the simultaneous equation system are more reliable and valid than that of single-equation.

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