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Financial performance under influence of credit risk in non-financial firms: evidence from Pakistan

Author

Listed:
  • Muhammad Mushafiq
  • Muzammal Ilyas Sindhu
  • Muhammad Khalid Sohail

Abstract

Purpose - The main purpose of this study is to examine the relationship between credit risk and financial performance in non-financial firms. Design/methodology/approach - In order to test the relationship between AltmanZ-score model as a credit risk proxy and the Return on Asset and Equity as indicator for financial performance with control variables leverage, liquidity and firm size. Least Square Dummy Variable regression analysis is opted. This research's sample included 69 non-financial companies from the Pakistan Stock Exchange KSE-100 Index between 2012 and 2017. Findings - This study establishes the findings that AltmanZ-score, leverage and firm size significantly impact the financial performance of the KSE-100 non-financial firms. However, liquidity is found to be insignificant in this study. AltmanZ-score and firm size have shown a positive relationship to the financial performance, whereas leverage is inversely related. Practical implications - This study brings in a new and useful insight into the literature on the relationship between credit risk and financial performance. The results of this study provide investors, businesses and managers related to non-financial firms in the KSE-100 index with significant insight about credit risk's impact on performance. Originality/value - The evidence of the credit risk and financial performance on samples of non-financial firms has not been studied; mainly it has been limited to the banking sector. This study helps in the evaluation of AltmanZ-score's performance in the non-financial firms in KSE-100 index as well.

Suggested Citation

  • Muhammad Mushafiq & Muzammal Ilyas Sindhu & Muhammad Khalid Sohail, 2021. "Financial performance under influence of credit risk in non-financial firms: evidence from Pakistan," Journal of Economic and Administrative Sciences, Emerald Group Publishing Limited, vol. 39(1), pages 25-42, May.
    • Handle: RePEc:eme:jeaspp:jeas-02-2021-0018
    DOI: 10.1108/JEAS-02-2021-0018
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    More about this item

    Keywords

    Credit risk; Altman Z-score; Financial performance; Profitability; Least square dummy variable; G32; G33;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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