Asian Research Thesis Index

Abstract

he introduction of financial sector reforms in developing countries has captured great attention of the researchers. In an imperfect capital market, external funds are more costly than internal funds and firms face financial constraints. Financial liberalization adverts to a reduction of regulation on the financial industry and helps to relax financial constraints, reduce cost of debt, and thereby increase the firm level investment. Previous studies at macro level resultantly favor the financial liberalization and growth of a country. On the other side the studies conducted at the micro level show mixed results and there is a dearth of literature for accepting/rejecting the notion of financial liberalization at the micro level. This dissertation examines the Impact of Financial Sector Reforms on the Capital Structure, Investment and Cost of Debt of Large Scale Manufacturing Sector listed at Pakistan Stock Exchange. A unique index for measuring the Financial Liberalization is developed obtaining the data from Financial Sector Assessment Progress Review Report (1991-2004) and Economic Survey of Pakistan (2005-2014). Principal Component Method is employed for the development of Financial Liberalization Index for the period 1991-2014. The data for large scale manufacturing firms is extracted from Balance Sheet Analysis published by State Bank of Pakistan. The sample includes the companies that remained listed at Pakistan Stock Exchange from 1993 to 2014 but the firms that did not survive for the period or are new entrants were not included in sample. The study utilized descriptive analysis and fixed effect model on the panel data of two hundred and ninety four (294) firms in GRATEL. In order to capture the insight effect of financial liberalization reforms fixed effect models were applied by categorized the data on the basis of small and large size firms. Separate analyses were made on different manufacturing sectors that includes Textiles, Food, Chemicals, Other manufacturing, Motor Vehicle, Fuel & Energy, Communication, Refined Petroleum, Paperboard, and Electrical Machinery. To observe during which government structure financial liberalization paved benefits the data was further segregated on the basis of democratic and non democratic government structure in Pakistan. Utilizing fixed effect model the study concludes that financial liberalization has significant impact on the leverage, investment, and cost of debt of manufacturing firms. Results drawn from the interaction of firm specific factors and liberalization  iv index reveal that financial liberalization improves the access of external funds for the financially constrained firms. The finding also concludes that firm level investment is also increased and financial reforms helped to reduce the cost of debt for the large scale manufacturing firms. Hence all the sectors did not gain benefit uniformly and it is also observed that small size firms gained the most from liberalization in terms of access to capital. Among different industries other manufacturing sector gained the most and textile sector did not gain much benefit from financial liberalization in terms of access to external funds. Research also unveils that reforms were beneficial during democratic government structure in Pakistan. Amongst different industries the investment level of textile sector is increased whereas, food and non metallic minerals did not improve much. It also concludes that investment level of firms is raised in democratic government structure. Furthermore, the cost of debt for the large size firm is improved as compared to the small size firms. The cost of debt for the manufacturing firms is favorable during the democratic government structure.

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