Measurement and Determinants of Financial Performance of Modaraba Companies: A Case Study of Pakistan

Abstract

Purpose: Profitability measurement is a comparative statistic that describes the relationships between overall profit and other financial determinants of the firm. Design/Methodology/Approach: The focus of this study is to measure the technical (TE), pure technical (PTE) and scale efficiency (SE) scores via Data Envelopment Analysis (DEA) of modaraba companies operating in Pakistan. The next stage is to study the empirical relationship between profitability, liquidity, leverage, and macroeconomic performance drivers. Financial statement data for 2010 to 2019 have been analyzed. Findings: Empirical findings of descriptive statistics, correlation and regression were measured. These empirical results reveal that capital ratio (CR) and operating expenses to net income (OENI) had negative correlation with PTE, SE and TE. Whereas the age of the firm had a negative correlation with PTE and TE and positive correlation with SE, moreover, exchange rate (EXC) PKR to USD, log of total assets (LTA) and management expenses (ME) had negative correlation with SE and positive correlation with PTE and TE. Furthermore, inflation (INF) had negative correlation with PTE and positive correlation with SE and TE. Moreover, number of certificates (NOC) had negative correlation with SE and TE and positive correlation with PTE. Implications/Originality/Value: Findings will be helpful to the management and policy makers for enhancing future financial performance by concentrating on these economic factors. More detailed and extensive data from the financial and non-financial aspects is suggested to support the hypothesized relationship of efficiency measures and determinants.