Measuring the Impact of Financial Fragility on The Performance of Islamic Financial Institutions Listed at Pakistan Stock Exchange
Keywords:
Firm Performance, Financial Fragility, Age, Size, Fixed Effect, Random Effect, and Pooled OLSAbstract
Financial fragility is of great importance for policymakers, practitioners, and researchers due to its impact on the dynamics of Islamic financial institutions operating in an economy. It leads to sluggish growth and investment of corporations and ultimately destroys the performance. This paper attempts to explore the presence of financial fragility and its impact on the performance of manufacturing firms listed at Pakistan Stock Exchange (PSX) from 2007-2016. To meet the objectives of the study, sample data set is split on the basis of median values of fragility, age and size of the firms and then classified as fragile, non-fragile, large, small, old and younger firms. The data is analyzed by using the fixed effect, random effect and pooled OLS techniques to examine the magnitude of relationship among the variables. The Return on Assets and Tobin’s Q ratios are used as performance measures which show the negative relationship with the financial fragility. Firms with the good equity ratio are observed as good performer in the market due to their financial strength. The younger firms are found as good performer than the older firms but financial fragility plays adverse role for younger and older firms. Performance of larger firms are reported better as compared to the smaller firms. Unlike the results of the interaction dummy variable of age and financial fragility, the presence of fragility doesn’t hamper the performance of large size firms. Nevertheless, the small size firms are found to be more affected from the presence of financial fragility. The results of study suggest to utilize retained earnings and reduce dependence on debt financing to improve the financial performance of fragile firms.
References
Agarwal, Rajshree, & Gort, M. (2002). Firm Product Life cycles and firm survival. American Economic Review .
Agliari, A., Gatti, D. D., Gallegati, M., & Lenci, S. (2006). The Complex Dynamics of Financially Constrained hetrogeneous firms. Journal of Economic Behavior & Organization , 784-803.
Arslan, O., Florackis, C., & Ozkan, A. (2006). The role of cash holdings in reducing investment–cashflow sensitivity: Evidence from a financial crisis period in an emerging market. Emerging Markets Review , 320-338.
Ayyagari, M., Demirguc-Kunt, A., & Maksimovic, V. (2008). Formal Versus Informal Finance: Evidence from China. Oxford Journals .
Baker, M., J. Stein, and J. Wurgler, 2003. When does the market matter? Stock prices and the investment of equity-dependent firms. Quarterly Journal of Economics 118, 969-1005.
Beck, T. (2012). Finance and Growth-lessons from the literature and recent crisis . Working Paper .
Beck, T., Demirguc-kunt, A., & Maksimovic, V. (2005). Financial and Legal Constraints to growth: Does firm size matter? The Journal of Finance , 137-177.
Bottazi, G., Secchi, A., & Tamagni, F. (2007). productivity, profitablity and financial fragility; emperical evidence from italin business firms.
Bruneau, C., Bandt, O., & Amri, W. E. (2012). Macroeconomic Flactuations and Corporate financial fragility. Journal of Financial Stability , 219-235.
Cameron, A. C., & Trivedi, P. K. (2005). Microeconomatrics Method and Applications. Cambridge: Cambridge University Press.
Carletti, E. (2008). Compitition and Regulation of Banking. Handbook of Financial Intermediation and Banking .
Chan, K. S., Dang, V. Q., & Yan, I. K. (2012). Financial reforms and Financing Constraints: Some evidence from listed Chinese firms. China Economic Review , 482-497.
Chathoth, P. C., & Olsen, M. D. (2007). Does Corporate Growth Really matter in the restaurant industry? International Journal of Hospitality Management , 26(1) 66-80.
Chen, Q., Goldstein, I., & Jiang, W. (2007). Price Informativeness and Sensitivity to Stock Price Investment. The Review of Financial Studies , 20 (3), 619-650.
Cleary, S. (2002). International Corporate Investment and the Role of Financial Constraints. York University , 1-42.
Clementi, G., & Hopenhayn, H. (2006). A theory of Financing Constraints and Firm Dynamics. Quarterly Jouranl of Economics .
Coricelli, F., & Mastern, I. (2004). Growth and Volatility in Transition countries: The Role of Credit. Working Paper .
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach . Expert Systems with Applications .
Ericson, R., & Pakes, A. (1995). Markove-Perfect industry dynamics: A framework for empirical work. Review of Economic Studies , 53-82.
Fama, E. F., & French, K. R. (2005). Financing decisions: who issues stock? Journal of Financial Economics , 72, 549-582.
Fazzari, S., Hubbard, G., & Petersen, B. (1988). Financing Constraints and Corporate Investment. Brookings Paper on Economic Activity , 141-195.
George, R., Kabir, R., & Qian, J. (2011). Investment–cash flow sensitivity and financing constraints: New evidence from Indian business group firms. Jounal of Multinational Financial Management , 69-88.
Gitman, L. J. (2010). Principles of Managerial Finance. England: Pearson Education Limited.
Gonzalez, V. M. (2013). Leverage and corporate performance: International Evidence. International Review of Economics and Finance , 169-184.
González, V. M. (2013). Leverage and corporate performance: International evidence. International Review of Economics & Finance, 25, 169-184.
Hericourt, J., & Poncet, S. (2009). FDI and Credit Constraints: Firm-level evidence from China. Economic Systems , 1-21.
Hong, Z., Shuting, Y., & Meng, Z. (2012). Relationship between free cash flow and financial performance Evidence from the listed Real Estate Companies in China. International Conference on Innovation and Information Management . Hangzhou: IACSIT Press, Singapore.
Hubbard, R. (1998). Capital Market Imperfections and Investment. Journal of Economic Literature , 193-225.
Jovanovic, B. (1982). Selection and Evolution of industry. Economatrica , 649-670.
Kallkan, A., Erdil, O., & Cetinkaya, O. (2011). The relationship between firm size, prospector strategy, architecture of information technology and firm performance. 7th International Strategic Management Conference (pp. 854-869). Turkey: Elsevier Ltd.
Kaplan, S. N., & Zingales, L. (1997). Do investment-cash flow sensitivities provide useful measures of financing constraints?. The quarterly journal of economics, 112(1), 169-215.
King, R., & Levine, R. (1993). Finance and Growth: Schumpeter might be right. Journal of Economics , 727-737.
Kiymaz, H. (2006). The impact of announced motives, financial distress and industry affiliation on shareholder's wealth: Evidence from large sell-offs . Quarterly Journal of Business and Economics , 69-89.
Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. American Economic Review , 537-558.
Loderer, C., & Waelchli, u. (2009). Firm Age and performance. The Journal of Finance .
Majumdar, S. K. (1997). The impact of size and Age on Firm-level performance: Some evidence from India. Review of Industrial Organization , 231-241.
Mao, Z., & Gu, Z. (2008). The relationship between financial factors and firm performanc: Emperical Evidence from U.S Restaurent Firms. Journal of Foodservice Business Research .
Minetti, R., & Zhu, S. C. (2011). Credit Constraints and Firm Export: Microeconomic evidence from Italy. Journal of International Economics , 109-125.
Modigliani, F., & Miller, H. M. (1958). The Cost of Capital, Corporation Finance and Theory of the Investment. The American Economic Review , 48 (3), 261-297.
Moyer, R. C., McGuigan, J. R., & Kretlow, W. J. (2001). Contemporary Financial Management. Mason: South-West Cengage Learning.
Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance .
Roenfeldt, R. L., & Cooley, P. L. (1978). Predicting Corporate profitability for investment selection . Journal of Business Finance & Accounting , 57-65.
Schumpeter, J. A. (1935). The analysis of economic growth. Review of Economic Statistics , 2-10.
Stein, J. (2003). Agency, Information and Corporate Investment. Hand Book of Economics of Finance .
Tabbasum, A. (2008). Economic Growth and Income Inequility Relationship: Role of Credit Market Perfection. Working Paper .
Villalonga, B. (2004). Diversification discount or premium? New evidence from the business information tracking series. The Journal of Finance, 59(2), 479-506.
Vitali, S., Battiston, S., & Gallegati, M. (2011). Financial Fragility and distress propogation in a network of regions. Working Paper .
Wu, M. (2006). Corporate Social Performance, Corporate Financial performance, and firm size: A meta-analysis. Journal of American Academy of Business.
