1. own understanding of company’s functioning, make

1. Introduction

1.1. Background

We Will Write a Custom Essay about 1. own understanding of company’s functioning, make
For You For Only $13.90/page!

order now

Profitability of companies is one of the most challenging
spheres of theoretical and empirical research in the modern finance. It has
always been interesting for the researchers to understand what factors affect
financial performance of companies most significantly and which of them have no
substantial effect. Furthermore, the process of profitability changes has been
significant for investor, managers and other stakeholders as each of these
groups, having their own understanding of company’s functioning, make their
decisions regarding its perspectives based on this understanding (Niresh and
Velnampy, 2014).

Besides internal factors, which influence company’s
performance such as firm structure, managerial structure, capital structure,
investment decisions, economic shocks tend to have tremendous effect on firm
performance (Onuonga, 2014). The global financial turmoil of 2007-09 was one of
the latest crises that affected businesses globally and to a large extent
changed the ways of firm performance, especially in the financial sphere. It is
important to understand what effect this crisis has had on the global business
and how financial performance of companies has changed after it (Alkhazaleh and
Almsafir, 2014).

1.2. Aim and Objectives

The aim of this research is to identify the most
significant factors that affected financial performance of UK companies before
the global financial crisis (GFC) 2007-09 and how these relationships changed
afterwards. Therefore, the objectives of the research are the following:

determine whether the GCF influenced profitability of UK companies;

find out whether profitability of financial companies is higher than the one of
non-financial firms;

estimate the influence of capital structure, corporate governance and company
size on profitability of UK firms.

2. Literature Review

Fang et al. (2014) explored the effect of the GFC on a
sample of 200 largest banks around the globe. The researchers showed that the
crisis affected financial performance of these organisations significantly. In
particular, it was indicated that all banks exposed worse figures in profitability,
quality of their assets, liquidity, and growth rates. Along with that, risks connected
with these dimensions of firm financial performance were shown to be higher in
the post-crisis period. At the same time, the GFC was exhibited to have a more
significant negative impact on advanced financial markets compared to that on financial
markets of emerging economies. This was revealed in more severe negative effect
on financial performance of banks in developed markets rather than in
developing ones. On the other hands, the outcomes of the analysis also showed
that large-scale banks which are located mostly in the advanced countries, had
more opportunities to recover after the GFC than banks in the emerging markets.

In particular, large banks had greater economies of scale which allowed them to
better mitigate negative effects of the crisis.

Dencic-Mihajlov (2014) investigated how profitability
of large and medium-sized firms, whose stocks were traded on the Belgrade Stock
Exchange, was influenced within the post-recession period in 2008-2011. The author
revealed that it was large-scale companies with higher liquidity that had higher
profitability. As for the other factors, asset impairment, growth opportunities,
and institutional ownership were shown to be significant drivers of return of
assets used as a proxy of firm performance. At the same time, these factors did
not have a significant effect on operating margin.

3. Methodology

The data employed for the analysis are retrieved from
the Thomson One Baker database and financial statements of the FTSE 100
companies. The period of analysis 2005-2017 is divided into two sub-periods,
namely 2005-2009 which captures the pre-crisis and crisis times, and 2010-2017
which represents the post-crisis times. This allows for comparing financial
performance of companies in the sample before and after the global financial
crisis. Moreover, the other dimension of subdividing the sample is
distinguishing between financial and non-financial companies. Financial
companies have been in the very epicentre of the crisis while non-financial
sector was affected more indirectly.

The method employed for exploring the sample is the
ordinary least squares (OLS) regression. This method is appropriate for
analysing linear effects of several factors on the dependent variable. Panel
data is analysed as the data in the sample changes in two dimensions. In
particular, years represent a change in periods while companies represent
cross-sectional changes.

The following hypotheses are tested in the study: