Indicator variables model of firm's size-profitability relationship of electrical contractors using financial and economic data

According to some electrical contractors who are members of the Federated Electrical Contractors, electrical contractor firms may experience a lack of profitability as the firm grows in size. Under these conditions, statistical models were developed to study the firm's size-profitability relationship. Economic data were obtained from the National Bureau of Economic Research, Bureau of Economic Analysis, and Mortgage Information Service. Financial data for 1985-1996 were obtained from the FEC group. Statistical analysis reveals that small, medium, and large firms are significantly different from each other in terms of their profit rate; profitability drops as firms grow larger than $50 million in sales. An indicator variables model with a first-order autoregressive model built into the error term was developed using backward elimination regression. Data from the year 1996 were used to validate the model, which predicted 76% of the year 1996 response variable, profitability, correctly.