– The purpose of this study is to determine and investigate the relative importance of different factors that result in profit heterogeneity at firm level.
– This study uses analysis of variance (ANOVA) random effect model for a broad-based panel data of 337 listed firms for 22 years period from 1987 to 2008 to explain variation in firm profitability. Using ownership structure as a basic criterion, it develops different models to observe the impact of different independent variables on profit variation.
– Profitability has a strong relationship with the firm-specific variables. This study demonstrates that for the firms operating in Pakistan, having its own peculiar macroeconomic anomalies, pervasive credit risk, poor corporate governance, and inefficient legal and regulatory framework; leverage is the dominant factor in explaining total variation in profitability and adversely affecting it. Size, liquidity, market share and age have a positive impact on profitability in all models, except domestic sectors where size and liquidity have significant negative and insignificant positive relationship, respectively. It finds an insignificant relationship of capital intensity and growth with the profitability. Further, significant but generally negligible impact of year, stable and transient industry effect is observed.
– The analysis for this study is restricted to the factors extracted from the financial statements of the firms. Such a restriction may exclude some strategic and macroeconomic factors that may affect firm profitability and consequently may reduce explanatory power of the models. It is, however, necessary for two reasons: first, restricting the analysis to financial statements only will keep the focus endogenous; and second, the non-availability of consistent data for variables of a so-called all inclusive model.
– These findings have strong policy implications both for the firms and the economic managers of Pakistan. The owners and managers of the firms operating in countries like Pakistan should consider both the capital structure and liquidity level to achieve higher profitability. The policy makers should improve the regulatory framework of corporate as well as banking sectors of Pakistan not only to help improve corporate profitability but also to ensure development of capital market in Pakistan.
– This is probably first study of its kind that tries to explain variation in firm profitability in Pakistani context using a broad-based panel data.
