DefinePK

Abstract

Financial fragility is of great importance for policymakers, practitioners, and researchers due to its impact on the dynamics of Islamic financial institutions operating in an economy. It leads to sluggish growth and investment of corporations and ultimately destroys the performance. This paper attempts to explore the presence of financial fragility and its impact on the performance of manufacturing firms listed at Pakistan Stock Exchange (PSX) from 2007-2016. To meet the objectives of the study, sample data set is split on the basis of median values of fragility, age and size of the firms and then classified as fragile, non-fragile, large, small, old and younger firms. The data is analyzed by using the fixed effect, random effect and pooled OLS techniques to examine the magnitude of relationship among the variables. The Return on Assets and Tobin’s Q ratios are used as performance measures which show the negative relationship with the financial fragility. Firms with the good equity ratio are observed as good performer in the market due to their financial strength. The younger firms are found as good performer than the older firms but financial fragility plays adverse role for younger and older firms. Performance of larger firms are reported better as compared to the smaller firms. Unlike the results of the interaction dummy variable of age and financial fragility, the presence of fragility doesn’t hamper the performance of large size firms. Nevertheless, the small size firms are found to be more affected from the presence of financial fragility. The results of study suggest to utilize retained earnings and reduce dependence on debt financing to improve the financial performance of fragile firms.