Assessing the Influence of Firm and Macroeconomic Variables on Corporate Profitability in India

Abstract

Corporate profitability not only shows the firm's ability to generate revenue but also strongly communicate the health of the industrial sector of any country. The aim of this research was to provide realistic evidence about the factors motivating corporate profitability in India. Firm specific variables comprised of liquidity ratio, leverage ratio, firm size, and export intensity of selected firms. Among the macroeconomic variables, we included gross domestic product, wholesale price index, USD - INR exchange rate, and current account balance of India. To enable studying the varying relationship between the selected exogenous factors and corporate profitability, we segregated this study into three phases, that is, full period (2000 to 2015), prior to the global financial crisis period (2000 to 2007), and post global financial crisis period (2009 to 2015). We employed panel regression's fixed effect model and random effect model to determine the influence of these variables on firm's profitability. The outcome of the research indicated that leverage ratio had a significant negative relationship in both full period and pre-crisis period, while liquidity ratio and export intensity had a positive impact during the full study period. None of the macroeconomic factors solely affected the profitability of the firms. The study also revealed that no single variable used in the study affected corporate profit during the post-crisis period. Thus, beckoning corporate profitability depended upon a combination of various internal and external information.