Exploring the Nexus between Financial Flexibility, Managerial Efficiency, Ownership, and Performance: An Interactive Model for Growth, Mature, and Stagnant Companies in Pakistan

Abstract

After financial crises, regulatory control makes it difficult for firms in acquiring cash flows to sustain financial safety. As a result, many listed companies in Pakistan prone to follow the “new pecking order theory” whereby they prefer equity financing rather than debt financing. Yet, the dynamics between financial constraints, efficiency, and performance are not clear. And whether the firm life cycle affects these dynamics, is still an open question. Hence, the purpose of this paper is to examine whether the managerial efficiency of Pakistani firms with financial flexibility is demonstrated differently across firm life cycles. To measure flexibility, we created a modified Financial Flexibility Index (FFI) based on Chang & Ma (2019) methodology. The study employed a sample of 30 firms listed on Pakistan stock exchange and gathered data from the annual reports during the period 2009 to 2018. The fixed effect regression model is applied by using balanced panel data. The result revealed that financial flexibility has a significant and positive effect on firm performance, however firm performance in the stagnant stage of lifecycle does not have a significant effect with financial flexibility, while in the mature and growth stage there is a significant impact of FFI on firm performance. More importantly, managerial efficiency (ME) turns out to be the key factor in affecting firm performance in all the stages of the lifecycle. It seems to have a negative effect. However, a negative complementarity was observed between FFI and ME, meaning higher FFI would decrease the negative impact of ME in performance. This complementarity turns positive in mature companies, as compared to the other two groups. Tobin's q, Dividends and Ownership, and Tangibility have a significant and positive effect overall, However, Tangibility seems to affect negatively growth and stagnant companies. Variables like control power, block holder ownership, Size, and Age doesn’t seem to affect performance. This study has implications for corporate managers, if they want to reduce the chances of financial distress and enhance the firm performance, then they obtain and maintain financial flexibility by keeping the leverage at a low level.