The relationship between market capitalization and financial performance of enterprises: A theoretical overview and future research directions

Abstract

This study synthesizes the theoretical foundations and empirical findings regarding the relationship between market capitalization and corporate financial performance. Based on signaling theory, the efficient market hypothesis, and agency theory, improved financial performance is predicted to increase market value. The literature synthesis indicates that the majority of studies record a positive relationship between market capitalization and corporate financial performance: large-cap firms generally achieve higher financial efficiency, and conversely, highly profitable enterprises are often assigned higher market valuations. However, the magnitude and direction of this relationship remain inconsistent across different research contexts. Some studies suggest the potential existence of a bidirectional relationship between these two sets of variables. This research gap underscores the need to identify and further evaluate the dynamic nature as well as the bidirectional causality between market capitalization and financial performance, particularly in the emerging market of Vietnam during the recent volatile period. On this basis, the paper proposes a theoretical framework and directions for subsequent empirical modeling to test the degree of alignment between market valuation and corporate financial fundamentals.