Relationship between financial risks and firm value: A moderating role of capital adequacy
-
Author(s)Tahir Saeed JagiraniLink to ORCID Index: https://orcid.org/0000-0002-5526-6442
,
Lim Chee CheeLink to ORCID Index: https://orcid.org/0000-0001-6255-8884
,
Zunarni KosimLink to ORCID Index: https://orcid.org/0009-0008-9848-4010
-
DOIhttp://dx.doi.org/10.21511/imfi.20(1).2023.25
-
Article InfoVolume 20 2023, Issue #1, pp. 293-303
- Cited by
- 1051 Views
-
331 Downloads
This work is licensed under a
Creative Commons Attribution 4.0 International License
The study of firm value and financial risks became more important after the global financial crisis of 2007–2008, as the required risk was mismanaged, resulting in a deterioration in firm value. It is important to study the relationship between financial risks and firm value. This study aims to examine the moderating effect of capital adequacy on the relationship between financial risks and the firm value of listed banks in Pakistan. This study is based on half-yearly secondary data of 560 sample observations from 2009 to 2021. Multiple regression and panel data estimation techniques were employed for the analysis. The study used firm value as a dependent variable, proxied by Tobin’s Q, along with five independent variables and one moderating variable. The results of this study indicate that a higher capital adequacy ratio (CAR) increases firm value and has a moderating effect on financial risks and firm value. Nonperforming loans, net interest margin, and cost income ratio are found to have a significant negative relationship with firm value. The study concludes that the stock prices of listed banks in Pakistan are declining persistently, which causes the stock’s worth to shift from being inflated to being undervalued.
- Keywords
-
JEL Classification (Paper profile tab)G32, G21, L25, O16
-
References43
-
Tables8
-
Figures1
-
- Figure 1. Logical relationship between variables
-
- Table 1. Half-yearly observations of listed banks of Pakistan
- Table 2. Summary of variables and measurements
- Table 3. Descriptive statistics
- Table 4. Goodness of fit test
- Table 5. Regression results of financial risks and firm value
- Table 6. Pearson correlation
- Table 7. Moderating effects of CAR on financial risks and Tobin’s Q
- Table 8. Hypotheses testing results
-
- Abdel-Azim, M. H., & Abdelmoniem, Z. (2015). Risk Management and Disclosure and Their impact on Firm Value: The Case of Egypt. International Journal of Business, Accounting, & Finance, 9(1).
- Abdul Wahab, H., Saiti, B., Rosly, S. A., & Masih, A. M. M. (2017). Risk-taking behavior and capital adequacy in a mixed banking system: new evidence from Malaysia using dynamic OLS and two-step dynamic system GMM estimators. Emerging Markets Finance and Trade, 53(1), 180-198.
- Acharya, V. V., & Richardson, M. (2009). Causes of the financial crisis. Critical Review, 21(2-3), 195-210.
- Akram, H., & Rahman, K. U. (2018). Credit risk management: A comparative study of Islamic banks and conventional banks in Pakistan. ISRA International Journal of Islamic Finance, 10(2), 185-205.
- Agyemang-Mintah, P., & Schadewitz, H. (2018). Audit committee adoption and firm value: evidence from UK financial institutions. International Journal of Accounting & Information Management, 26(1), 205-226.
- Ayub, H., & Javeed, A. (2016). Impact and implications of capital adequacy ratio on the financing behaviour: Evidence from Islamic banks in Pakistan. Journal of Islamic Business and Management, 6(1).
- Badawi, A. (2017). Effect of Credit Risk, Liquidity Risk, and Market Risk Banking to Profitability Bank (Study on Devised Banks in Indonesia Stock Exchange). European Journal of Business and Management, 9(29), 1-8.
- Badru, B. O., Ahmad-Zaluki, N. A., & Wan-Hussin, W. N. (2017). Board characteristics and the amount of capital raised in the Malaysian IPO market. Journal of Multinational Financial Management, 42, 37-55.
- Bhuiyan, M. B. U., Cheema, M. A., & Man, Y. (2020). Risk committee, corporate risk-taking and firm value. Managerial Finance, 47(3), 285-309.
- Bouheni, F. B., Ammi, C., & Levy, A. (2016). Banking Governance, Performance and Risk-taking: Wiley Online Library.
- Chari, M. D., David, P., Duru, A., & Zhao, Y. (2019). Bowman’s risk-return paradox: An agency theory perspective. Journal of Business Research, 95, 357-375.
- Chen, Y.-K., Shen, C.-H., Kao, L., Yeh, C.-Y. (2018). Bank liquidity risk and performance. Review of Pacific Basin Financial Markets and Policies, 21(01).
- Chen, L.-J., & Chen, S.-Y. (2011). The influence of profitability on firm value with capital structure as the mediator and firm size and industry as moderators. Investment Management and Financial Innovations, 8(3), 121-129.
- Chernobai, A., Ozdagli, A., & Wang, J. (2020). Business complexity and risk management: Evidence from operational risk events in US bank holding companies. Journal of Monetary Economics, 11(7).
- Dauda, I., & Nyor, T. (2018). Credit Risk and Shareholders’ Value in Nigerian Deposit Money Banks IOSR Journal of Business and Management, 20(7), 36-46.
- Du, J., Wu, F., & Liang, X. (2016). Corporate liquidity and firm value: evidence from China’s listed firms. International Seminar on Social Science and Humanistic Education.
- Ebenezer, O. O., Islam, M. A., Yusoff, W. S., & Rahman, S. (2019). The Effects of Liquidity Risk and Interest-Rate Risk on Profitability and Firm Value among Banks in ASEAN-5 Countries. Journal of Reviews on Global Economics, 8, 337-349.
- Esan, O. M., Nwobu, O., Adeyanju, I. T., & Adeyemi, J. O. (2022). Firm Value Response to Internal and External Corporate Governance in the Nigerian Stock Market. Asian Economic and Financial Review, 12(4), 227-243.
- Fallatah, Y., & Dickins, D. (2012). Corporate governance and firm performance and value in Saudi Arabia. African Journal of Business Management, 6(36), 10025-10034.
- Hanif, H., Naveed, M., & Rehman, M. (2019). Dynamic modeling of systemic risk and firm value: A case of Pakistan. Cogent, Business and Management, 6(1), 1651440.
- Inoguchi, M. (2016). Nonperforming Loans and Purchase of Loans by Public Asset Management Companies in Malaysia and Thailand. Pacific Economic Review, 21(5), 603-631.
- Ishtiaq, M. (2015). Risk management in banks: determination of practices and relationship with performance.
- Isidro, H., & Sobral, M. (2015). The effects of women on corporate boards on firm value, financial performance, and ethical and social compliance. Journal of Business Ethics, 132(1), 1-19.
- Javeed, A., Yaqub, R. M. S., Aslam, M. (2017). Revisiting capital structure and firm value: moderating role of corporate governance: Evidence from Pakistan. Developing Country Studies, 7(5), 39-48.
- Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360.
- Kakanda M. M., & Salim, B. (2017). Corporate governance, risk management disclosure, and firm performance: A theoretical and empirical review perspective. Asian Economic and Financial Review, 7(9) 836-845.
- Kirkpatrick, A. K., & Radicic, D. (2020). Tax Planning Activities and Firm Value: A Dynamic Panel Analysis. Advances in Taxation, 27, 103-123.
- Klynveld Peat Marwick Goerdeler (KPMG). (2020). Snapshot of results of banks in Pakistan (pp. 1-18).
- Laeven, L., & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics, 93(2), 259-275.
- Liu, C., Uchida, K., & Yang, Y. (2012). Corporate governance and firm value during the global financial crisis: Evidence from China. International Review of Financial Analysis, 21, 70-80.
- McShane, M. K., Nair, A., & Rustambekov, E. (2011). Does enterprise risk management increase firm value? Journal of Accounting, Auditing & Finance, 26(4), 641-658.
- Mishra, R. K., & Kapil, S. (2018). Board characteristics and firm value for Indian companies. Journal of Indian Business Research, 10(1), 2-32.
- Nazir, M. S., & Afza, T. (2018). Does managerial behavior of managing earnings mitigate the relationship between corporate governance and firm value? Evidence from an emerging market. Future Business Journal, 4(1), 139-156.
- Olalere, O., Islam, M. A., Junoh, M. Z. M., Yusoff, W. S., Iqbal, M. M. (2020). Revisiting the impact of intrinsic financial risks on the firm value of banks in ASEAN-5 countries: a panel data approach. Banks and Bank Systems, 15(2), 200-213.
- Parida, S., & Wang, Z. (2018). Financial crisis and corporate social responsible mutual fund flows. International Journal of Financial Studies, 6(1), 8.
- Perera, L., & Morawakage, P. (2017). Credit risk management and shareholder value creation: with special reference to listed commercial banks in Sri Lanka. Kelaniya Journal of Management, 5(2).
- Rafique, A., Quddoos, M. U., Akhtar, M. H., & Karim, A. (2020). Impact of financial risk on financial performance of banks in Pakistan; the mediating role of capital adequacy ratio. Journal of Accounting and Finance in Emerging Economies, 6(2), 607-613.
- Saeed, J. T., & Tahir, J. H. (2015). Relationship between Earning Per Share & Bank Profitability. International Journal of Novel Research in Humanity and Social Sciences, 2(2), 4-13.
- Shah, S. S. H., Xinping, X., Khan, M. A., Harjan, S. A. (2018). Investor and manager overconfidence bias and firm value: Micro-level evidence from the Pakistan equity market. International Journal of Economics and Financial Issues, 8(5), 190.
- Sheikh, N. A., & Khan, M. (2016). Effects of excess cash, board attributes and insider ownership on firm value: evidence from Pakistan. Australasian Accounting Business and Financial Journal, 10(1), 29-39.
- Situmorang, D. P., & Augustine, Y. (2019). The Effect of Risk Management on Firm Value with Firm Performance as a Mediation (Study in Banking Industries Listed in IDX) for the year 2013-2017. Research Journal of Finance and Accounting, 10(4), 1-5.
- Vintila, G., & Gherghina, S. C. (2013). Board of directors independence and firm value: empirical evidence based on the bucharest stock exchange listed companies. International Journal of Economics and Financial Issues, 3(4), 885.
- Vo, T. T. A., Bui, P. N. K. (2017). Impact of Board Gender Diversity on Firm Value: International Evidence. Journal of Economics and Development, 19(1), 65-76.
-
Inventory management, cost of capital and firm performance: evidence from manufacturing firms in Jordan
Ashraf Mohammad Salem Alrjoub ,
Muhannad Akram Ahmad
doi: http://dx.doi.org/10.21511/imfi.14(3).2017.01
Investment Management and Financial Innovations Volume 14, 2017 Issue #3 pp. 4-14 Views: 3018 Downloads: 2135 TO CITE АНОТАЦІЯSeveral studies have examined the relationship between inventory management and firm performance. However, most of these studies ignore the impact of inventory types on the relationship. Moreover, the relationship is influenced by some factors such as cost of capital which has not been considered. This study examines the moderating effect of cost of capital on the relationship between inventory types and firm performance. The data of 48 firms for the period 2010-2016 which formed 279 firm-year observations were used in this study. With the use of Pearson correlation and panel Generalized Method of Moments (GMM) estimation, the findings show that inventory management with consideration of its types influence firm performance in the long term. In addition, it is also found that cost of capital moderates the relationship between inventory management and firm performance. However, the interaction between cost of capital and inventory types has different implications. It is suggested that firms should consider cost of capital when making decision on inventory types and align their inventory control to fit in to the changes in their business environment.
-
Does capital structure affect firm value in Vietnam?
Tien Dat Dang , Thi Van Trang Do
doi: http://dx.doi.org/10.21511/imfi.18(1).2021.03
Investment Management and Financial Innovations Volume 18, 2021 Issue #1 pp. 33-41 Views: 2231 Downloads: 1242 TO CITE АНОТАЦІЯThis study aims to examine whether the capital structure and several factors have significant influences on firm value in Vietnam. To achieve this objective, 435 non-financial listed companies have been selected from 2012 to 2019 on Vietnamese stock exchanges. Four groups of firms continue to be chosen from the total to investigate the differences in the outcomes among industries. The results altogether using the GMM method show that the impact of capital structure and other control variables on firm value is significant, yet different across industries: capital structure has a significant positive impact on firm value in the food and beverage industry, but has a significant negative effect on the value of the firm in wholesale trade and construction, as well as real estate industry, while has an insignificant influence on enterprise value considering all industries. Apart from the firm size, the impact of other control factors on firm value also indicates mixed results.
-
The impact of foreign ownership on corporate governance: evidence from an emerging market
Rawan Shubita , Moade Fawzi Shubita
doi: http://dx.doi.org/10.21511/imfi.16(2).2019.09
Investment Management and Financial Innovations Volume 16, 2019 Issue #2 pp. 101-115 Views: 2213 Downloads: 352 TO CITE АНОТАЦІЯThis research explores the influence of foreign ownership on non-financial public shareholding firms in the Amman Stock Exchange (ASE). The study involved an investigation into the connection between non-Jordanian ownership and the company growth opportunity, stock liquidity, leverage, dividend policy and business output. The results highlight that foreign ownership can provide improved corporate governance practices by playing a decisive role in increasing the growth opportunity and enhancing the firms’ market valuation, as measured by Tobin’s Q. Moreover, the findings indicate that companies with foreign board membership have better operating performance and higher firm value. The rewards were reaped by foreign investors based on their superior monitoring ability, which affects the decisions made and actions taken by management.
