Financial Constraints Risk Assessment of Manufacturing Sector of Pakistan
Author: Aysha Muzaffar

The use of investment cash flow sensitivity as a measure of financing constraints is an ambiguous research agenda. When external finance is costly, firms face financing constraints in their investment decisions. Investment financing behavior varies with financial constraints. This study aims to investigate the impact of internal and external financing behavior on firm’s investment by using a panel of 498 firms of manufacturing sector of Pakistan over the period of 1974 to 2012, by employing the techniques of Ordinary Least Square (OLS) and Generalized Method of Moments (GMM) one step and two steps. By using GMM, we avoid most of the problems with traditional OLS models and this will also allow comparing the results of both techniques. Firms are divided into groups of size, age, cash flow, dividend payout, HPSA index and WW index and found that investment sensitivity is not monotonic with respect to financial constraints for majority of classes based on single firm financial status estimate. Opposite results obtained for WW index and age of the firm. Both methods of estimation gave the results in same line with some high estimated coefficients values in GMM. This might be due to inclusion of lagged dependent variable in GMM method. This study confirms financing constraints paradigm idea empirically and supports previous studies that constrained firms can be identified and display monotonic relationship of investment financing behavior for a developing country like Pakistan. A comprehensive analysis of investment financing behavior across different time frame and sectors concluded that the way firms are a priori classified as financially constrained and unconstrained matters. Supervisor:- Dr. Shahid Mansoor Hashmi

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Keywords : Financing Constraints, GMM, Investment Cash Flow Sensitivity, OLS
Supervisor: Shahid Mansoor Hashmi

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