Ownership structure and financial constraints – Evidence from an emerging market

Abstract

PurposeThe purpose of this research is to examine the impact of corporate governance proxies by ownership structure on financial constraints for a sample of 215 non-financial Pakistan Stock Exchange (PSX) listed firms between 2010 and 2018.Design/methodology/approachThe dynamic generalized method of moments (GMM) estimator is used to determine the influence of ownership structure on financial constraints. The ownership structure of sample enterprises is measured using seven variables: managerial, family, institutional, foreign, associated, presence of block holder, and concentrated ownership, while financial limitations are determined using the KZ Index. The WW Index is used to assess the robustness of the results. In addition, for robustness, we also used OLS and FE.FindingsBased on the system GMM results, it was discovered that firm ownership structure has a significant impact on the likelihood of financial constraints. In the case of Pakistan, the results show that institutional ownership, foreign ownership, and the presence of a block holder in the ownership structure have a significant negative impact on financial constraints, whereas family ownership and ownership concentration have a significant positive impact. This finding remains true when financial constraints are measured using the WW Index.Practical implicationsThe findings of the study provide business managers and investors with more information regarding the relationship between corporate governance quality and the degree of financial constraint in Pakistani firms. Furthermore, this study contributes new information from emerging nations like Pakistan to the existing literature, which will help regulatory bodies and policymakers build long-term corporate governance solutions to manage financial constraints. It is well established that improving the quality of corporate governance practices improves capital market efficiency and lowers the likelihood of financial constraints.Originality/valueThe study adds to the body of existing work on corporate governance and the possibility of financial constraints, with a focus on Pakistan. The findings show that when projecting company financial constraints, regulators should pay special attention to the quality of corporate governance, specifically ownership structure.

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“…Several studies, including Kim et al . (2021), Zhao and Xiao (2019), and Farooq et al . (2022), take a similar approach to capturing the impact of FC by using the WW Index.…”

“…Following the study of Farooq et al . (2022), we used the KZ Index to measure the degree of FC of the sample firms.…”

“…Additionally, we also computed the degree of FC of sample firms through the WW Index developed by Whited and Wu (2006) to assess the level of FC faced by the sample firms. Several studies, including Kim et al (2021), Zhao andXiao (2019), andFarooq et al (2022), take a similar approach to capturing the impact of FC by using the WW Index. We calculated WW Index as follows:…”

“…Table1explains the measurement details for these variables.3.2.1 Measurement of financial constraint. Following the study ofFarooq et al (2022), we used the KZ Index to measure the degree of FC of the sample firms. Table2shows the FC variables measured in this study.…”

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“…The study’s initial sample includes all firms listed on the PSX between 2010 and 2019. Financial firms are excluded from the initial sample due to greater variation in financial reporting, accounting rules and regulations and corporate governance requirements (Farooq et al , 2022). As a result, the current study only uses non-financial firms to achieve the study’s objectives.…”