External Financial Resource Management by Listed Pakistani Firms

Publication Year : 2007

Enterprises need finance for investment and acquire it either by internally generated finance or externally generated finance, which are closely related to the ownership structure, financial market development and enforcement of law of a country. In underdeveloped companies with foreign owners have an advantage in their access to external finance as compare to domestically owned companies because their financial resources coming from abroad. Access to external finance is a key determinant of a firm’s ability to develop, operate, and expand. Economic researchers have studied how various macroeconomic and microeconomic factors influence such access; for example, it has been shown that the need of external finance to depend on the macroeconomic environment, since economic downturns tend to limit firms’ ability to borrow and banks’ willingness to lend. This “credit channel” research argues that corporate access to credit is the principal mechanism linking monetary policy and the real economy. At the micro level, research has shown that characteristics specific to a firm influence the degree to which macroeconomic changes affect its access to external financing; specifically, firms that are more vulnerable financially—such as smaller, younger, riskier, and more indebted firms—are found to be more affected by tighter monetary policy.