Effect of Macroeconomic Factors on Firms’ ROA: A Comparative Sectorial Analysis from Pakistan

Abstract

The effect of firm-level factors or industry-specific determinants on company performance has been worked on in Pakistan but the researches are mainly focused on textile industries and to an extent agro-food industry. This study has been conducted on the effect of macroeconomic factors on firm performance in Pakistan with the focus being on seven industries. 10-year data of 5 companies each in 7 industries in Pakistan (35 companies) was collected through the financial reports, from their official websites. Seven industries were selected the Sugar, Textile, Garments, Automotive, Food, Ceramics, and Cement industries. The effect of macro-economic factors like Inflation Rate, Real Effective Exchange Rate, Foreign direct investment and Unemployment Rate, as well as Unit Labor Cost, were assessed on Return on Assets for each industry using separate regressions. The results indicated that inflation was a significant factor in the sugar industry whereas labor unit cost and exchange rate significantly contributed to textile industry firm performance. Garment and auto industry firm performance was heavily influenced by inflation and unemployment. Lastly, the food and cement industry ROA was greatly influenced by the rate of exchange and FDI. Whereas these macroeconomic factors had very little impact on the Ceramic industry. These results can assist managers, company auditors, lenders, and regulatory bodies to identify businesses that will be affected by macroeconomic changes and use this information to improve future performance.