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Nonlinearities can be investigated through the use of second-order (quadratic) and third-order (cubic) terms for the size variable. For example, a positive and statistically significant coefficient for the sales-squared variable would indicate that profit margins increase at a pace faster than the rate of change in sales. A positive and statistically significant coefficient for the sales-cubed variable indicates a growing rate of increase in profit margins, and so on. The effects of firm size on profits and profit rates among giant corporations are shown in Table 10.6.

A. Based upon the findings reported in Table 10.6, discuss the relation between firm size and profitability. Does large firm size increase profitability?

B. Discuss any differences among alternative profit rate measures. Based upon the findings reported in Table 10.6, discuss the relation between firm size and profit rates. Does large firm size increase profit rates?

C. Does the fact that auto giant Nissan Motor reported a net loss make it more or less difficult to find a positive link between profitability and firm size for the entire sample during this period? Should this observation be dropped from the analysis? What other important determinants of profitability might be included in a more detailed study of the profitability/firm size relation?

CASE STUDY (continued)

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