Volume 2 Issue 4 | 2025 | View PDF
Paper Id:IJMSM-V2I4P104
doi: 10.71141/30485037/V2I4P104

Bigger Is Not Always Better? The Moderating Role of Firm Size on the Relationship between Profitability, Activity Ratio, and Earnings Growth: An Agency Theory Perspective

Hendro Paulus, Awaludin, Rezza Irawan, Iskandar Darmawan, Ergamayta Saptira

Citation:
Hendro Paulus, Awaludin, Rezza Irawan, Iskandar Darmawan, Ergamayta Saptira, "Bigger Is Not Always Better? The Moderating Role of Firm Size on the Relationship between Profitability, Activity Ratio, and Earnings Growth: An Agency Theory Perspective" International Journal of Multidisciplinary on Science and Management, Vol. 2, No. 4, pp. 31-40, 2025.

Abstract:
This study investigates the effect of profitability and activity ratios on earnings growth, with firm size as a moderating variable, under the framework of agency theory. The research focuses on companies in the consumer non-cyclicals sector listed on the Indonesia Stock Exchange (IDX) during the 2020–2024 period. The sample was determined using a purposive sampling approach, yielding 74 firms with 222 firm-year observations. Data were analyzed using EViews 13 software through multiple linear regression and moderated regression analysis (MRA). The empirical results reveal that ROA does not significantly influence earnings growth, whereas the TATO exhibits a significant positive impact. Furthermore, the interaction between firm size and ROA (FS*ROA) is statistically insignificant, while the interaction between firm size and TATO (FS*TATO) demonstrates a significant negative moderating effect. These findings suggest that higher asset utilization efficiency contributes to improved earnings growth; however, this relationship tends to weaken in larger firms, possibly due to heightened agency conflicts and the complexity of managerial decision-making in resource allocation. The study provides both theoretical and practical implications, emphasizing the need for effective monitoring mechanisms in large corporations to mitigate agency problems and sustain profitability- driven growth.

Keywords: Earning Growth, Return on Asset, Total Asset Turnover, Firm Size, Agency Theory.

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