Investment Dynamics Of Financially Constrained And Unconstrained Firms Of Manufacturing Sector Of Pakistan: An Empirical Investigation
Author: Shagufta Ahmad

This study investigates investment dynamics of financially constrained and unconstrained firms of manufacturing sector of Pakistan by taking the sample of 498 firms for the period of 1974 to 2012 for empirical analysis. Financial variables are constructed using firm level data from more than 15,000 financial statements of manufacturing sector firms. Generalized methods of moments (GMM) technique is applied on investment model. Firms finance their investments by three sources of financing i.e. internal finance, debt and Equity. Under financial hierarchy hypothesis firms prefer to use internal finance over external finance as the firms find external financing costly. Hence internal finance is of significance importance in determining firms’ investments when financial constraints are present as firms’ are mainly dependent upon their internal funds to finance their investment activities. Cash flows are used as a source of internal finance and sales are incorporated in the model to capture investment opportunities. Firms are divided in financially constrained and unconstrained categories via financial constraints measures including Operating income, Net income, Interest Coverage ratio and Dividend Payout ratio to analyze their general investment behavior. Firms are further distributed in different categories accordingly financial constraints levels present in them via Dividend Payout ratio, Interest Coverage ratio, Firms’ tangibility and Size to observe the comparison of firms’ investment behavior at different constraints levels. Probability of Financial Constraints Risk for each firm is calculated using the logit model. Afterwards firms are distributed in Quartiles to check whether firms’ investments vary with their financial constraints risk level. The investment model is estimated across different political regimes to compare firms’ investment behavior across time periods. Lastly, investment model is estimated across several industries i.e. Textile-Synthetic, Textile-Cotton, Chemical, Engineering and Sugar and allied industry to compare to compare their investment behavior. Empirical results confirmed financially constrained and unconstrained firms behave differently. This study accepted the financial hierarchy hypothesis in case of financially unconstrained firms. The Investment-Cash flows sensitivity is found positive in case of unconstrained firms revealing that these firms are more sensitive towards change in cash flows. Whereas, it was found either zero or negative in case of constrained firms. Firms’ tangibility and size is explored significantly important for effecting firms’ investment behavior. Financial constraints risk analysis suggests that firms’ with lower risk level are dependent upon evolution of internally generated funds for their investments as evident by their cash flows and sales. Political regime analysis shows that firms are constrained by internal finance in Democratic era. Industrial analysis reveals that investment in Textile-Cotton, Textile-Synthetic and sugar industries are sensitive towards change in internal finance Supervisor:- Dr. Shahid Mansoor Hashmi

Meta Data

Supervisor: Shahid Mansoor Hashmi

Related Thesis​