Relationship between return on assets and firm value: institutional holdings and firm size as moderators

The present study explores the relationship between return on assets and firm value. Most importantly, the mediating effect of the dividend payout ratio and the moderating effect of institutional investors are examined. The data for this study was collected from secondary sources, which included financial information. The sample consisted of five pharmaceutical companies with 192 data points over a ten-year period and was analyzed using Hayes’s PROCESS macros. The findings of the study indicate that (i) return on assets is positively associated with the firm value and dividend payout ratio, (ii) dividend payout ratio was negatively related to firm value, (iii) the firm’s size moderates the relationship between return on assets and dividend payout ratio, and institutional holdings. The findings support moderating effect of firm size (second moderator) in the relationship between the return on assets and institutional investors (first moderator) and dividend payout ratio and firm value, mediated through dividend payout ratio. This type of moderated-mediation model is novel in the literature on finance. This innovative methodology would be of interest to researchers in finance. © The Author(s), under exclusive licence to Springer Nature B.V. 2023.