| Abstract | The aim of this thesis is to enhance the understanding of the suitable measures of financial constraints for the case of a developing country and the effects of financial constraints on firm‟s activities. In this respect, we employ data for Pakistani listed non-financial firms from 2006 to 2015, check the presence of financial constraints, evaluate measures of financial constraints and examine the effects of financial constraints on a firm‟s behaviour.
A number of studies check the presence of financial constraints at firm level for the case of developed countries. However, Due to different set up of financial markets between developed and developing countries, the effects of financial constraints on firm‟s activity may differ for developing country. Moreover, the measures of financial constraints have been introduced in the setup of developed countries; using those measures for the case of developing country without evaluation can misguide the findings. Besides, literature does not give any accurate measure of financial constraints. By addressing these gaps, our first empirical chapter of this study uses two different estimation frameworks: q model and error correction model to check the presence of financial constraints at firm-level. The findings in the first empirical chapter indicate the presence of financial constraints in the listed Pakistani firms, where large and dividend-paying firms are found to be less financially constrained than small and non-dividend-paying firms. We further use the latest measures of financial constraints: KZ index, WW index, HP index, and assets tangibility to sort firms into financially constrained statuses. We find that WW index, HP index, and assets tangibility are performing better, showing the difficult access to external finance among Pakistani listed firms. In addition, to evaluate the applicability of these measures for the setting of Pakistan, we regress the accounting variables of the latest measures on the financial constraint status of the firms. We find cash flow, total debt, age, and cash holdings as continuous significant determinants of a firm‟s financial status in different modelling estimations.
We explore the role of financial constraints on firms‟ export entry decisions in our second empirical chapter. Previous studies show a link between financial health and export participation decision leaving a gap for us to check the role of financial constraints in export participation decision. Moreover, most of the previous studies examine this relationship for the developed economies; while studies on this relationship in the context of an emerging developing economy like Pakistan is very important for the policy makers of the country. Our empirical study finds exporters are significantly different from non-exporters in terms of the level of financial constraints. By using different estimators to estimate the export market empirical specification, a firm‟s financial constraint status appears to be a determining factor of an export entry decision. Consistent results are found for two different measures of financial constraints. In addition, we find Export entrants are less financially constrained in terms of assets tangibility, before entering the export market. Inconsistent with previous studies, we do not find that liquidity level of the firm is playing any significant role in export participation decisions for the case of Pakistani firms.
In the third empirical chapter, we study the relationship between financial constraints, political connections and performance of the firms. Some studies show a relationship between political connections and financial status of the firms, while some other studies show a relationship between firms‟ financial status and firms‟ performance. This is the first study which checks the direct relationship between political connections, financial constraints and performance of the firms. Literature shows that political relationship has been used as useful resources of the firms, studies in this context for the case of developing country can be particularly important for policy makers to use these resources for the benefit of the firms. By using two different measures of political connections and instrumental variable approach, our study shows that firms‟ formal political connections make firms less financially constrained. In addition, we find strong evidence that politically connected firms are performing badly. These results are robust to three different measures of a firm‟s performance. We further find some evidences that the effects of political connections on firms performance do vary across different financial statuses of the firms. |
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