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Estimating Firms’ Vulnerability to Short-Term Financing Shocks: The Case of Foreign Exchange Companies in Pakistan

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  • Ijaz Hussain

    (Head of Department of Economics, Beaconhouse National University, Lahore, Pakistan.)

Abstract

Using firm-level balance sheet data for 20 of the 24 exchange companies in Pakistan for the period 2006–11, we explore the sources of firms’ vulnerability to short-term financing shocks. Based on the probability estimates of a maximum likelihood binary probit model, this paper shows that the incidence and degree of vulnerability of foreign exchange companies to short-term financing shocks has risen significantly over time. If not managed opportunely, these shocks can cumulate into long-term financing shocks and even lead to corporate failure in the long run. Our regression results show that the corporate managers of these companies cannot ignore macroeconomic factors such as global changes and the macroeconomic environment (inflation and GDP growth) in addition to firm-specific factors (growth opportunities, firm size, permanent earnings, earnings volatility, and working capital management) when managing their firms’ vulnerability to short-term financing shocks.

Suggested Citation

  • Ijaz Hussain, 2013. "Estimating Firms’ Vulnerability to Short-Term Financing Shocks: The Case of Foreign Exchange Companies in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 147-163, July-Dec.
    • Handle: RePEc:lje:journl:v:18:y:2013:i:2:p:147-163
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    More about this item

    Keywords

    Foreign exchange companies; vulnerability; financing shocks; Pakistan.;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L80 - Industrial Organization - - Industry Studies: Services - - - General
    • L89 - Industrial Organization - - Industry Studies: Services - - - Other

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