At the Crossroads: Exploring the Relationship Between Financial Decisions and Firm Performance of Distressed Firms in the Pakistan Stock Exchange

Abstract

The primary aim of this study is to assess the influence of financial decisions on the financial performance of distressed firms in Pakistan. Specifically, the research delves into three pivotal financial decisions: dividends, capital structure, and investment choices. Utilising balance sheet analyses published by the State Bank of Pakistan, relevant data were gathered for companies listed on the Pakistan Stock Exchange. The sample for this investigation comprises 185 non-financial firms listed on the PSX over the past eight years (2010-2017), utilising panel data. Regression analysis using the Ordinary Least Squares (OLS) technique was employed to examine the relationships. The results reveal that the dividend policy significantly and positively impacts return on assets, while its effect on return on equity is found to be insignificant. The study also explores the impact of capital structure on the performance of distressed firms, indicating an insignificant and negative effect on return on assets. Additionally, a highly significant positive relationship is identified between taxes and both returns on assets. Concerning return on equity, a negative and highly significant association is observed between long-term debt and ROE. Furthermore, the investigation examines the effects of over- and under-investment on firm performance in distressed firms. The findings suggest that over-investment has a significant and positive impact on return, while under-investment demonstrates a significant and positive effect on return on assets and an insignificant positive impact on return on equity. This study contributes to the understanding of the impact of over and under-investment on firm performance, an aspect not previously explored in distressed firms.