Impact of Financial Decisions on Firm Performance: Path Analysis Approach

Abstract

This study intended to explore causal relationships between the corporate performance and financial decisions of the firms which are listed on the Pakistan stock exchange (PSX). This study has used Return on assets and Tobin's Q as the measures of accounting performance and market performance respectively. To effectively examine the causal structure of corporate financing, investment, dividend payout decisions, and the firm performance simultaneously this study has used path analysis approach. The sample comprises 292 non-financial firms which are listed on the Pakistan Stock Exchange (PSX). The findings clearly show that debt financing has positive effect on the investment and dividend has negative effect on the investment decisions. The debt financing and investment has a negative impact on corporate performance while dividend decisions has a positive impact on corporate performance. This study helps to understand the corporate decision making process of Pakistani firms. To the author's knowledge this is the first study attempted to check the application of path analysis in emerging economies to study the causal structure of corporate financial decisions and corporate performance.