Factors Affecting Firms' Performance: The Case of Greece

Introduction In the era of globalization, competition has become fiercer than ever. Reduced trade barriers, spread of technology and lower costs for communication and transportation have sharpened international competition. The economic changes in Eastern European countries, the completion of the European Union and the appearance of new economic powers in the global market have initiated specific discussion of production structures and the competitiveness of national industries. Intense competition in global and local markets requires firms to improve their financial performance. This is especially true for smaller countries, like Greece where profitability can allow firms to overcome the limitations of their small home markets in order to achieve their maximum potential. This improvement not only benefits the firms themselves, but also has a direct impact on the competitiveness of an economy as a whole. The international business literature is replete with empirical and conceptual works pertaining to competitiveness. However, there is still debate among several disciplines regarding how the performance of these firms should be measured and what factors affect business success. The purpose of this paper is to empirically implement a comprehensive framework of firm financial performance in the case of Greece. The specific research question is: "What are the factors which affect the financial performance of Greek industrial firms during the period 1997-2004? " The structure of this paper is as follows: Section 2 provides a literature review and presents an analytical framework. Section 3 discusses the data used and describes the methodology. Section 4 provides the estimation and the empirical results, while section 5 offers some conclusions. Literature Review and Analytical Framework A large body of previous theoretical and empirical research has tried to investigate various factors affecting firms' financial performance. Theoretical research is based on microeconomic theory and more specifically on the firm's theory of production (see for example Penrose, 1995). Empirical research has been developed around two areas of interest. First a number of researchers investigate how to measure firms' financial performance. There have been various measures of financial performance. For example return on sales reveals how much a company earns in relation to its sales, return on assets determines an organization's ability to make use of its assets and return on equity reveals what return investors take for their investments. The advantages of financial measures are the easiness of calculation and that definitions are agreed worldwide. Traditionally, the success of a manufacturing system or company has been evaluated by the use of financial measures (Tangen, 2003). Table 1 presents an overview of the reviewed measures of financial performance. A second strand of the empirical literature examines how financial and non-financial factors, such as debt leverage, liquidity, capitalization, investment, size, age, location, export performance and managerial efficiency have an influence on the firms' financial performance and growth. Debt leverage is measured by the ratio of total debt to equity (debt/equity ratio). It shows the degree to which a business is utilizing borrowed money. Companies that are highly leveraged may be at risk of bankruptcy if they are unable to make payments on their debt; they may also be unable to find new lenders in the future. Leverage is not always bad, however; it can increase the shareholders' return on their investment and make good use of the tax advantages associated with borrowing. The trade-off theory (TO) (Bradley, Jarrell and Kim, 1984; Harris and Raviv, 1991) suggests that every firm has a specific optimal debt-to-equity ratio determined by balancing the present value of expected marginal benefits of leverage (ex. tax savings due to paid interests) against the present value of expected marginal costs of leverage. …