Productive Efficiency And Optimal Firm Size: The Case Of US Health Services Industry

Abstract

This paper examines the link between firm size and productive efficiency. In so doing, it attempts to determine optimal firm sizes in terms of market capitalization and total asset thereby allowing firms to achieve higher level of productive efficiency. The results indicate that the optimal firm size in terms of market capitalization is $13.1 billion. In terms of total asset, the optimal firm size is $10.3 billion. The results also suggest that there is a threshold above which an increase in firm size adversely affects the level of productive efficiency. The results have important implications for managerial policies regarding firm restructuring. To achieve higher productive efficiency, smaller firms have to pursue expansion strategies through mergers and acquisitions. Larger firms, on the other hand, have to pursue divestment strategies to reduce the size of their assets, particularly by refocusing on core competencies.