Abstract
Business sustainability is compromised with an increase in insolvency risk. Firm growth is desirable, but it brings an associated bundle of high risks. We decomposed firm growth into internal and external growth and studied its impact on insolvency risk using a panel data set of 284 listed non-financial firms in Pakistan from 2013 to 2017. This study used the hierarchical multiple regression approach through panel corrected standard error (PCSE) and feasible generalized least squares estimators to test the proposed relationships. The results reveal that the leverage maturity ratio mediated the relationship between firm growth and insolvency risk. Moreover, we also collected fresh evidence on the moderating role of potential fixed collaterals that negatively moderated the relationship between leverage maturity and insolvency risk. It points toward the accumulation of non-productive fixed assets that create a burden for firms instead of helping them avail of favorable loan opportunities. The findings of this research suggests that fund managers should use more long term debt to tackle insolvency risk in highly volatile markets. Inclusion of assets that serve as better collaterals should be made part of the asset structure.
Highlights
Business sustainability is achievable by avoiding high financial distress (Zabolotnyy & Wasilewski, 2019)
The state owned business had a negative impact of audit quality and income growth on default risk In banking sector, the Ethopian commercial banks under analysis a significant positive impact of growth measured through net income on financial entrenchment was observed This study on the contrary provrd a significant negative association between firm growth and insolvency risk in 330 firms listed at Pakistan Stock Exchange (PSX)
This research is based on the recent claims made by Xuezhou et al (2020a) that consider the relationship between growth and insolvency risk as indirect because the riskiness of growth depends on the leverage arrangements made by a firm
Summary
Business sustainability is achievable by avoiding high financial distress (Zabolotnyy & Wasilewski, 2019). Firm failures are at their peak in firms seeking rapid growth (Lukason & Laitinen, 2016), and continuous rise in insolvency risk is one of the reasons that cause frequent business failures. Insolvency risk refers to the times when firms find honoring their financial obligations difficult. The growth–insolvency risk nexus puzzle remains a less explored area, in the developing world. This relationship seems ambiguous in previous studies as growth is proved to be a positive (Patel et al, 2018) and a negative predictor of risk (Loderer & Waelchli, 2015). The majority of previous studies discussed growth as a one-dimensional concept and ignored its endogenous and
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