Relationship between financial risks and firm value: A moderating role of capital adequacy

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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.

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    • 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
    • Conceptualization
      Tahir Saeed Jagirani
    • Data curation
      Tahir Saeed Jagirani, Lim Chee Chee
    • Formal Analysis
      Tahir Saeed Jagirani, Zunarni Binti Kosim
    • Investigation
      Tahir Saeed Jagirani, Lim Chee Chee
    • Methodology
      Tahir Saeed Jagirani, Lim Chee Chee, Zunarni Binti Kosim
    • Project administration
      Tahir Saeed Jagirani, Zunarni Binti Kosim
    • Software
      Tahir Saeed Jagirani
    • Visualization
      Tahir Saeed Jagirani, Lim Chee Chee
    • Writing – original draft
      Tahir Saeed Jagirani
    • Writing – review & editing
      Tahir Saeed Jagirani
    • Supervision
      Lim Chee Chee, Zunarni Binti Kosim
    • Validation
      Lim Chee Chee, Zunarni Binti Kosim