Abstract
his paper examines the relationship between financial constraints and the stock returns explaining
the pricing of stock through financially constrained and unconstrained firms in Pakistan. Three
proxies; total assets, tangible to total assets and cash holding to total assets ratios) have been used
for financial constraints and the study tried to investigate that either the investors are compensated
for taking the extra risk or not in Pakistan Stock Exchange (PSX). We find that the financially
constrained firms don’t earn higher returns when their capital structure is heavy with liquid assets
and their cash flows are more than the unconstrained firms in PSX. Moreover, the time series results
showed that the risk-adjusted returns of the most constrained firms give the mix and somewhat
negative and significant and insignificant results for the Pakistani firms listed in PSX sorted based on
tangible to total assets and Cash holding to total asset ratios.
Musarrat Karamat, Muhammad Kashif. (2020) Do Financially Constrained Firms Earn Higher Returns than the Unconstrained Firms? A Comprehensive Evidence from Pakistan Stock Exchange, Abasyn Journal of Social Sciences, Volume-13, Issue-2.
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