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On the Mystery of Financial Conservatism: Insights from Pakistan

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  • Ammara Yasmin
  • Abdul Rashid

Abstract

This article empirically explores the prevalence and determinants of financial conservatism at Pakistani nonfinancial firms during the period 1998–2014. Along with several firm-specific variables as predictors of the most prominent theories, the effects of macroeconomic conditions and business group affiliation are also investigated. The results of the study show that approximately 14% of the firm-year observations are financially conservative. The ratio of financial conservatism almost doubled over that period, from 11.25% in 1999 to 20.76% in 2014. We find that financially conservative firms are more profitable, less risky, and pay higher dividends than their non-conservative counterparts. The results of the logistic regression reveal that the financial hierarchy and financial flexibility are the most powerful motives for avoiding debt financing. Finally, we show that macroeconomic conditions and business group affiliation also play a significant role in determining the likelihood of financial conservatism.

Suggested Citation

  • Ammara Yasmin & Abdul Rashid, 2019. "On the Mystery of Financial Conservatism: Insights from Pakistan," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 55(12), pages 2904-2927, September.
    • Handle: RePEc:mes:emfitr:v:55:y:2019:i:12:p:2904-2927
    DOI: 10.1080/1540496X.2018.1553158
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    Cited by:

    1. Hossain, Mohammed Sawkat, 2021. "A revisit of capital structure puzzle: Global evidence and analysis," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 657-678.
    2. Saona, Paolo & Vallelado, Eleuterio & San Martín, Pablo, 2020. "Debt, or not debt, that is the question: A Shakespearean question to a corporate decision," Journal of Business Research, Elsevier, vol. 115(C), pages 378-392.
    3. Maria Kokoreva & Anastasia Stepanova & Kirill Povkh, 2023. "The New Strategy of High-Tech Companies Hidden Sources of Growth," Foresight and STI Governance (Foresight-Russia till No. 3/2015), National Research University Higher School of Economics, vol. 17(1), pages 18-32.
    4. Qamar uz Zaman & M. Kabir Hassan & Arshad Hafiz Muhammad, 2020. "Managerial Efficiency and Corporate Leverage Policy in Pakistan," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 16(2), pages 25-46.
    5. Chipeta, Chimwemwe & Aftab, Nadeem & Machokoto, Michael, 2021. "The implications of financial conservatism for African firms," Finance Research Letters, Elsevier, vol. 42(C).
    6. Uz Zaman, Qamar & Ehsan, Sadaf & Hassan, Mohammad Kabir & Javed, Muzhar & Ul Hassan, Syed Iftikhar, 2022. "Corporate Social Responsibility and Zero Leverage," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 56(1), pages 33-46.

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