Internal vs. External Financing under Uncertainty: Assessing Sustainable Corporate Financing Behavior in Pakistan

Abstract

With an unpredictable and volatile economic setting, companies are pursuing sustainable financing behavior which becomes difficult to achieve for those firms who are facing financial constraints. This study identifies 250 non-financial firms in Pakistan as financially constrained and non-constrained based on cash flows over capital, total assets, and the ratio of dividends paid (DPO). A comparative analysis of financial behavior of 24 years is applied using data of 1999 through 2022. Various regression models such as stepwise fixed effects and system-GMM methods with robust standard errors deal with the problems of autocorrelation, heteroskedasticity and endogeneity. Important results also determine that size, growth, profitability, tangibility, liquidity, flexibility, DPO, and effective tax rate are important determinants of sustainable financing behavior. A company with limited external financing has to finance its operations through internal sources to cover short term liabilities and make long term investment. Conversely, firms that are not constrained financially portray different financing strategies. Certain parameters such as business risk were not significant. The research offers an example that can be used by analysts to analyze the variations in financing strategies among different types of firms. It also emphasizes future research potentials, such as involving financial firms in comparative studies and comparison of sustainable financing behavior across countries.