Open AccessA Study of A Causality Relationship between Profitability and Firm Value: A Comparison between European Countries
Author(s) -
Ben Said Hatem
Publication year - 2017
Publication title -
international finance and banking
Language(s) - English
Resource type - Journals
ISSN - 2374-2089
DOI - 10.5296/ifb.v4i1.9294
Subject(s) - profitability index , return on equity , debt ratio , return on assets , market value , market capitalization , tobin's q , book value , economics , monetary economics , equity (law) , enterprise value , financial economics , econometrics , business , debt , stock market , finance , biology , paleontology , earnings , horse , political science , law
The aim of our paper is to test for a causality interdependence between profitability and firm value. To this end, we examined a sample of two European countries: Italy and Poland. Our samples contain 200 firms from each country studied over a period of 4 years from 2007 to 2010. As a measure of firm performance, we use two ratios; return on assets and return on equity. Regarding firm value, we used two ratios; Tobin’s Q calculated as long-term debt increased by short-term debt divided by total assets, and Market To Book ratio calculated as market capitalization divided by shareholder’s equity. The descriptive statistics show that Italian firms have higher market values. We obtained mean values of 1,123 and 2,0698 of Tobin’s Q and MTB, respectively. However, firms of Poland are more profitable than firms of Italy. Using a data panel method, we concluded that for firms of Italy, there is a causality relationship between profitability, approximated by return on assets and return on equity and firm value, measured by Tobin’s Q. For firms of Poland, a causality relationship is also found.