“Impact of macroeconomic factors on firm performance: Empirical evidence from India”

Understanding the macroeconomic factors is essential for all firms operating in the economy. Investment decisions, financing decisions, and risk management of firms are influenced by the existing macroeconomic factors, thereby impacting their performance. This paper examines the effect of macroeconomic factors on the performance of Indian manufacturing firms. Two-step generalized method of moments model is applied in this investigation to analyze the effect of firm performance from the financial year 2004-05 to 2021-22. Firm performance is proxied by two accounting-based measures and a market-based measure, namely, return on assets, return on equity, and Tobin’s Q, respectively, while the macro-economic factor is proxied by annual gross domestic product growth rate. The empirical findings show that firm performance has a positive relationship with macroeconomic factors. In addition, the findings reveal that firm size, firm age, leverage, sales growth, and operating profit impact firm performance. The study further extends to examine the moderating effect of financing constraints (measured by firm size and age) on macroeconomic factors and firm performance. The results show that the effect is more pronounced on small and young firms as compared to large and mature firms. The study also evaluates the impact of macroeconomic factors on firm performance excluding the crisis periods (the financial crisis of 2008 and the COVID-19 pandemic) and finds the impact on the market performance to be insignificant during non-crisis periods. This study recommends that lenders, managers, and other stakeholders should take proactive policy measures for any anticipated adverse changes in macroeconomic factors on the performance of Indian firms.


INTRODUCTION
Several studies have used gross domestic product (GDP) as an indicator of macroeconomic factors (Cook & Tang, 2010;Gupta & Mahakud, 2020).When a country's GDP growth rate is high, coupled with a moderate rate of inflation existing in the nation, it is a favorable MEF, while when a country's GDP growth rate starts declining with a high rate of inflation existing in the nation, it is considered an adverse MEF (Tzang et al., 2013).Favorable MEF leads to reduced cost of external borrowings and increases the availability of external funds in the capital market, thereby providing easy access to firms.Besides, positive MEF gives an impetus to investments by attracting both domestic and foreign investors to invest during favorable factors, broadening the scope of borrowings.The firms' financial constraints are thus reduced paving the way for better firm performance.Firms face increased production, sales, and profitability during such times, which ultimately impacts their performance positively.Stakeholder theory states that the objective of business is to create value for all the parties involved (Freeman, 1984), and therefore, the relevance of firms performing well cannot be ignored from the perspective of shareholders, lenders and the government.It is therefore of utmost importance to analyze the determinants of firm performance.
Firm performance is affected by several factors.However, these factors may differ across economies and nations, more specifically across developed and developing economies.In an emerging economy like India, the laws and regulatory frameworks, institutional limitations and work culture are distinct from those of other developed countries (Deshpandé & Farley, 1999;Gupta & Mahakud, 2020).The Indian economy has recently become the 5th largest economy in the world in terms of nominal GDP (World Economic Forum, 2020) and is aiming to become a global manufacturing hub with their 'Make in India' initiative.The contribution of manufacturing sector in India is nearly 16% to the country's GDP, which is expected to increase to 25% by 2025 1 .Therefore, the scope of further exploring the association between MEF and company performance together with the moderating role of firm size and firm age in the context of manufacturing firms operating in India is enhanced.The research by Cook and Tang (2010) documented that under a good MEF, firms become capable of adjusting their capital structure (leverage) with more alacrity toward their stipulated target.Chang et al. (2019) found that under unfavorable macro-economic environment, firms prefer to raise funds from equity due to increased financing constraints.Khyareh and Rostami (2022) argued that through macroeconomic stability, the beneficial effects of innovation on competitiveness can be strengthened.Wang et al. (2014) in their study revealed that cash holdings of firms decrease when inflation increases.However, once inflation attains its threshold point, firms' cash holdings rise along with inflation.Further, studies have shown that increases in economic activity as indicated by GDP lead to better firm performance in Japan (Zeitun & Goaied, 2022).Killins (2020) explored the association between the GDP growth rate and the performance of Canadian life insurance companies demonstrating the relationship to be significant and positive.Al-Najjar (2014) documented the relationship between GDP growth and tourism firms' financial performance in Middle Eastern countries to be significantly positive.
It is evident from the literature that firm performance is impacted by macroeconomic factors in numerous ways.Issah and Antwi (2017) demonstrated that the effect of the GDP growth rate on business performance varies across industries.
Further, this study advocated that the impact of macroeconomic factors may vary from economy to economy and that it also depends upon the proxy used to indicate the MEF.The aforementioned studies have documented that a positive macroeconomic environment influences firm characteristics positively and the GDP growth rate impacts the firm performance of developed economies positively.Thus, the MEF as indicated by the GDP growth rate is expected to have a direct bearing on the performance of enterprises.
Iqbal et al. (2020) defined a firm's financial constraints by its size.In this context, Ibhagui and Olokoyo (2018) stated that the performance of small enterprises is affected more on account of high leveraging; however, as businesses grow, these negative effects reduce and ultimately become nil when the firm size exceeds a particular threshold level.Moreover, it has been revealed that only small-size businesses benefit from gender diversity on the board measured in terms of improving performance (Li & Chen, 2018).The study by Mansour et al. (2023) found a positive effect of financing to be more significant on the market performance of large-size firms.Therefore, small-size firms are more sensitive to firm characteristics than large-size firms.Besides, research also reveals that small enterprises are relatively more constrained in financial terms than largesize firms due to their reputation, networking, and collateral available to them (Gertler & Gilchrist, 1994;Iqbal et al., 2020).Financial institutions may obtain sufficient information about larger businesses relatively easily, which lessens the degree of information asymmetry between lenders and borrowers (Bernanke et al., 1996).This improves the availability of external financing to a greater extent (Rauh, 2006).According to Laghari and Chengang (2019), the high cost of external borrowings and credit rationing caused the desired working capital levels of financially restricted firms to be typically lower.
Thus, firm size can have both a direct and indirect impact on firm performance.Therefore, it is argued that large-size firms can render certain benefits in the form of easy accessibility to external financing primarily because of their networking and reputation.It is therefore probable that smallsize enterprises' performance is more vulnerable to macroeconomic shifts than large-size ones.
Firms' financial constraints have also been defined by its age (Bakhtiari et al., 2020;Oliner & Rudebusch, 1992).Rossi (2016) argues that there have been mixed findings on firm age affecting its performance.Mature firms have an impact on performance through intermediary processes like routine and reputation (Coad et al., 2018).Foreign investors favor companies that have been operating for a longer period than start-ups or companies that are in their infancy (Mallinguh et al., 2020).Even though R&D activities decrease with corporate ageing (Loderer & Waelchli, 2009), such activities seem to be riskier for younger firms than mature firms (Coad et al., 2016).
Therefore, this study proposes that both mature and young firms have benefits and limitations, which can affect their performance in positive or negative ways.However, due to their reputation and experience, mature firms are preferred over young firms by investors.Moreover, young firms are faced with more financial constraints making it difficult for them to borrow from external markets which affects their cost of production, sales, and firm performance.MEF may play a more significant role in reducing financial constraints for young firms than mature firms.Consequently, the performance of young firms is more sensitive to macroeconomic changes than mature firms.
This study aims to empirically investigate the association between MEF and performance of firms along with the examination of firm size and age as moderators.
In light of the studies discussed, the following hypotheses are proposed: H 1 : Good macroeconomic factor improves firm performance.
H 2 : The performance of small-size firms is relatively more sensitive to macroeconomic factors than large-size firms.
H 3 : The performance of young firms is more sensitive to macroeconomic factors than mature firms.

METHOD
The data used in this study are derived from the CMIE Prowess-IQ database.The yearly data are taken for analysis for the period of 2004-05 to 2021-22.673 firms with continuous data are identified for the period of 18 years of analysis making it 12,114 firm-year observations to assess the impact of the MEF on firm performance.45 firmyear observations were identified as outliers, and so 12,069 firm-year observations were taken for the final analysis.Firm performance is identified as a dependent variable consisting of ROA (Lin & Fu, 2017) 1 shows the description and measurements of the variables.

Methodology
The Wooldridge test and the Pesaran test confirm the existence of autocorrelation and cross-sectional dependency in the dataset.Therefore, the presence of heteroscedasticity and autocorrelation restricts this study from applying the pooled OLS or fixed effect, as argued by Baltagi (2008).to address the endogeneity issue, a dynamic panel data model, i.e., two-step generalized method of moments (GMM) estimation that was developed by Arellano and Bond (1991), has been employed.The over-identifying restrictions are not found valid as per the Sargan test.Therefore, a two-step GMM with robust standard error has been used.The baseline estimation model is as follows: . Further, the second estimation model is as follows:

Descriptive statistics and VIF
Table 2 presents descriptive statistics of all the variables.The mean values for the dependent variables ROA, ROE and Tobin's Q for the selected sample are 0.05, 0.01 and 1.54, respectively.While the mean value for the independent variable, i.e., MEF (indicated by GDP growth rate), is 0.062, which indicates that the average GDP growth rate in the selected sample period is 6.2%, which implies that since the past 18 years, India is growing at an immense rate and hence is considered one of the rapidly advancing economies.

RESULTS
Table 4 presents the results for firm performance measured using ROA, ROE, and Tobin's Q.The significant and positive coefficient of MEF confirms the first hypothesis (H 1 ) implying that when an economy grows at a high rate, the performance of the firm also improves.The result is statistically significant at a 5% level of significance on ROA and ROE, and at a 1% level of significance on Tobin's Q. Coefficient is highest on Tobin's Q (i.e., 1.79) followed by ROE (i.e., 0.11) and ROA (i.e., 0.03).This suggests that if MEF increases by 1%, the performance of firms will increase by 1.79%, 0.11% and 0.03% when measured by Tobin's Q, ROE, and ROA, respectively.In addition, the empirical findings show that sales growth and profits have a significant and positive effect, while tangibility and leverage have a significant and negative effect on firm performance.
A robustness test is conducted by controlling the ownership concentration and macroeconomic variables as shown in equation 2. Table 5 reports the results for the same.Further, the findings remain more or less the same on all the three proxies of firm performance.The ownership concentration, inflation rate, bank rate and exchange rate are found to influence at least one of the proxies.The baseline results are consistent with after con-  The z-statistics are reported in parentheses.(iv) AR2 denotes the p-values of the second-order serial correlation test utilizing residuals of initial differences, which are asymptotically distributed as N(0,1).
(i.e., 0.11), ROE (i.e., 0.32) and Tobin's Q (i.e., 3.91) is statistically significant at the 1% level of significance.Therefore, the findings reveal that young firms experience a more pronounced impact of MEF on their performance than mature firms, confirming the third hypothesis (H 3 ).
This study performs an additional test to check the robustness of the baseline findings.For this, two different crisis periods, the sub-prime crisis of 2008 and the COVID-19 pandemic are controlled by excluding the financial years of 2007-08, 2008-09, 2020-21, and 2021-22 from the sample.Hence, the duration of this study is limited to 14 years.The results from Table 8 show that the findings remain more or less the same for accounting-based measures while the results are different for the mar-ket-based measure.In the main analysis, Tobin's Q is found to be highly significant statistically at the 1% significance level.While in the additional analysis where crisis period is excluded, MEF becomes statistically insignificant.Therefore, it can be inferred from here that crisis periods do affect the performance of firms, especially when it is measured using a market-based measure as investors are likely to react more to adverse situations.

DISCUSSION
The baseline finding shows that favorable economic factors impact firm performance positively, which implies the better the state of the economy, the better will be the firm performance.This can  be attributed to numerous reasons.Firstly, under favorable MEF, firms have better access to funds in the financial markets at a lower cost.Consequently, the production costs improve, which in turn encourages firms to increase their capital expenditures, which enhances production, sales and ultimately profits.Secondly, during a good MEF, both domestic and foreign investors are motivated to invest more and save less, which increases the scope of financing.Hence, firms can easily borrow from the external sources reducing the financial constraints and paving the way for firms to improve through their development projects.This also eventually improves performance.The results provide evidence to show that firm performance is impacted positively under favorable MEF.This result is similar to prior research by Killins (2020) and is in sync with H 1 .
Since the findings indicate that MEF and firm performance have a positive relationship, therefore, managers should monitor MEF on an ongoing basis so that proactive steps can be taken in anticipation of any adverse MEF.Further, lenders and investors can also review the MEF to ensure the security of their funds before providing finance.Finally, policymakers can advise the government on policy measures to tide over adverse MEF.
This study also finds the positive impact of sales growth and profits on firm performance, implying that any increase in yearly sales and operating profits will contribute to the enhancement of firm per-formance.Since sales and operating profits constitute firms' net return, it is expected to have a direct relationship with firm performance.Contrary to this, tangibility and leverage carry a negative influence on the performance of firms inferring that any increase in fixed assets and external borrowings will lower firm performance.The expenses of purchasing tangible assets and increased financing costs of raising debt brings down the companies' financials and performance.These results are in alignment with prior studies by Altaf  .Therefore, managers need to focus more on maximizing sales and operating profits and raise debt and increase their fixed assets only when needed.
The findings of the second objective document the performance of small-size firms to be more impacted by the MEF.Small-size firms face the problem of financial constraints due to their size, lack of collateral, low reputation and networking which does not hold true for large-size firms.Thus, the impact on small-size firms is greater than on large-size firms.Thus, the results are in sync with H 2 .Thus, managers of small-size firms are required to focus on MEF together with lending agencies and investors to ensure availability of funds.
The results also reveal the effect of MEF to be more pronounced for young firms.Similar to small-size firms, young firms are more prone to financial constraints, while similar to large-size firms, mature firms get more access due to the factors mentioned above.The findings from this are in sync with H 3 .
The findings also show that the impact of MEF on market performance is more when compared to accounting performance, which is similar to prior research by Iqbal et al. (2020).Hence, it can be inferred that market reactions are strong for all types of firms irrespective of their size and age, possibly because investors expect a decline in the performance of all types of firms during a bad MEF.Since investors' confidence may be negatively affected during an adverse MEF, this could lead to a fall in market capitalization and hence, Tobin's Q.
The results show that financially constrained firms, as defined by their size and age, are more prone to be affected by MEF as compared to firms with better risk appetite and financial muscle.Moreover, the performance of these firms is likely to be impacted by a greater degree in times of both favorable and adverse factors.Thus, stakeholders need to assess the impact of MEF on these firms.

CONCLUSION
This study investigates the effect of the macroeconomic factor on the performance of Indian manufacturing firms.Further, the research is extended to analyze the degree to which macroeconomic factors affect the performance of small-size and large-size firms and mature and young firms.Return on assets, return on equity and Tobin's Q are used as the proxies for firm performance, and the annual gross domestic product growth rate is identified for macroeconomic factors.The empirical findings using a twostep generalized method of moments demonstrate that under good macroeconomic factor, businesses perform better and vice versa implying that adverse macroeconomic situations increases firms' financing constraints, which in turn affects the production, sales, profitability, and performance.Besides, small-size firms and young firms have been observed to be more affected by macroeconomic factor.
This study suggests the management, lending institutions and investors need to monitor the state of the economy to tap investment opportunities during favorable economic situations and adopt a conservative approach during adverse economic situations.Management can alter their strategic plans in accordance with prevailing macro factor and anticipated changes thereon.Regulatory agencies can adopt flexible measures in their policies to mitigate any detrimental impact on firms' financials during uncertain or adverse macro situations.The study's limitation is that only manufacturing companies are considered for analysis and that too for a specific economy, India.Hence, the future scope of this study is that financial firms can also be included coupled with a cross-country study that may provide new insights.Further, the moderating role of other firm-specific variables can also be examined in the context of firm performance.

Table 1 .
and ROE (Al-Najjar, 2014) as accounting-based measures, and Tobin's Q (Aggarwal et al., 2019) as a market-based measure.MEF is the main variable of interest, which is proxied by the annual GDP growth rate (Cook & Tang, 2010; Gupta & Mahakud, 2020).Further, the change in the GDP growth rate (ΔGDP) and a dummy variable of MEF have been used as the robustness tests.Definition of variables -sales ratio, working capital, capital expenditure and profit, ownership concentration, bank rate, inflation rate, unemployment rate and the exchange rate are taken as control variables.
Leverage, firm size, liquidity, sales growth, firm age, cash flow from operations, tangibility, cash conversion cycle, research and development expenses, ex-Control variable BR Central bank interest rate The rate of lending by the central bank to domestic banks.Control variable UR Unemployment rate The percentage of individuals without a job.Control variable ER Exchange rate The rate used to convert one currency into another.This study uses USD/INR.Investment Management and Financial Innovations, Volume 20, Issue 4, 2023 http://dx.doi.org/10.21511/imfi.20(4).2023.01port-toerwise, a small-size firm (Altaf & Ahmad, 2019).A firm age having a higher value than or equal to the median age is considered a mature firm otherwise a young firm (Tan & Tusha, 2023).Table FP it is the dependent variable, i.e., firm performance for firm i at period t represented by ROA, ROE or Tobin's Q, FP it-1 is the 1-year lag-dependent variable, i.e., either ROA, ROE or Tobin's Q; MEF t is the macroeconomic factor, INF t is the inflation rate, BR t is the central bank interest rate, UR t is the unemployment rate, ER t is the exchange rate at period t; FA i,t is the firm age, LEV i,t is the leverage, FS i,t is the firm size, LIQ i,t is the liquidity, SG i,t is the sales growth, CF i,t is the cash flow, TAN i,t is the tangibility, EXTS i,t is the export to sales ratio, WC i,t is the working capital, CCC i,t is the cash conversion cycle, R&D i,t is the research & development expenditure, CAPEX i,t is the capital expenditure, PROF i,t is the operating profit and OC i,t is the ownership concentration for firm i at period t.In addition, the variable ϒ t is a time dummy variable, δ i the firm's unobservable individual effects, and ε it the random disturbance. (2))where

Table 3 .
VIF (4)p://dx.doi.org/10.21511/imfi.20(4).2023.01trollingforownershipconcentration and macroeconomic variables.The second objective determines whether MEF has an impact on firm performance across the firm size.Equation 2 is used to estimate the effect.The results from Table6show that the performance of both large and small firms is positively impacted by MEF.For large-size firms, the coefficient of MEF on ROA (i.e., 0.06), Tobin's Q (i.

Table 4 .
Baseline regressionNote: (i) ***, **, and * are significant at 1%, 5% and 10% levels respectively.(ii) Other firm control variables such as cash flow, export to sales, working capital, cash conversion cycle, research & development expenditure and capital expenditure are suppressed for brevity.(iii) The z-statistics are reported in parentheses.(iv) AR2 denotes the p-values of the second-order serial correlation test utilizing residuals of initial differences, which are asymptotically distributed as N(0,1).

Table 5 .
Robustness test controlling ownership concentration and macroeconomic variables Note: (i) ***, **, and * are significant at 1%, 5% and 10% levels respectively.(ii) Other firm control variables such as cash flow, export to sales, working capital, cash conversion cycle, research & development expenditure, capital expenditure; ownership concentration; macroeconomic control variables such as central bank interest rate, inflation rate, unemployment rate and exchange rate are suppressed for brevity.(iii)

Table 6 .
Large-size firms and small-size firms Note: (i) ***, **, and * are significant at 1%, 5% and 10% levels, respectively.(ii) Other firm control variables such as cash flow, export to sales, working capital, cash conversion cycle, research & development expenditure, capital expenditure; ownership concentration; macroeconomic control variables such as central bank interest rate, unemployment rate and exchange rate are suppressed for brevity.(iii) The z-statistics are reported in parentheses.(iv) AR2 denotes the p-values of the second-order serial correlation test utilizing residuals of initial differences, which are asymptotically distributed as N(0,1).

Table 7 .
Mature firms and young firmsNote: (i) ***, **, and * are significant at 1%, 5% and 10% levels respectively.(ii) Other firm control variables such as cash flow, export to sales, working capital, cash conversion cycle, research & development expenditure, capital expenditure; ownership concentration; macroeconomic control variables such as central bank interest rate, unemployment rate and exchange rate are suppressed for brevity.(iii) The z-statistics are reported in parentheses.(iv) AR2 denotes the p-values of the second-order serial correlation test utilizing residuals of initial differences, which are asymptotically distributed as N(0,1). http://dx.doi.org/10.21511/imfi.20(4).2023.01