Access to Finance, Financial Development and Firm Performance – Evidence from Pakistan

Abstract

Purpose- The aim of the study is to investigate the impact of financial constraints on firm performance. The role of financial development in reducing financial constraints is also investigated. Design/methodology/approach- Data from two waves of World Bank Enterprise Surveys from 2007 to 2013 was used to construct the required variables. A balanced sample of 427 firms was selected and a fixed-effect model was used for empirical estimations.

Findings- The findings indicate the significance of access to finance in terms of explaining firm performance. Improvement in access to finance led to subsequent improvement in firm performance as measured by labour productivity. The role of financial development in reducing credit constraints is not as expected. The concentration of lending to the private sector in the hands of large corporations at the expense of small and medium enterprises could be the reason for such a result.

Originality/value – Most of the work in this area is focused on large listed firms. The present study focused primarily on small and medium-sized enterprises in Pakistan. Multiple measures of financial constraints and firm performance were used for robustness. The investigation also covers the role of financial development and its microeconomic implications at the level of an enterprise.