Impact of Market Risk on Credit Risk of Subsequent Period in Manufacturing Sector of Pakistan

Munawar Shabbir, Shazia Hassan and Ayesha Zareef
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Munawar Shabbir: PhD Scholar, Department of Leadership and Management Studies, National Defence University, Islamabad, Pakistan.
Shazia Hassan: Assistant Professor, Department of Leadership and Management Studies, National Defence University, Islamabad, Pakistan.
Ayesha Zareef: Lecturer, Department of Leadership and Management Studies, National Defence University, Islamabad, Pakistan.

Global Social Sciences Review, 2018, vol. 3, issue 3, 281-299

Abstract: Firm's business activities are focused on profit making. The cultural, technological, organizational, financial and operational challenges followed by different risks like market or credit risks make it difficult for firms to focus on their sole aim of earning profit. Previous studies have highlighted that market risk and credit risks have a significant influence on firm's performance. However, prediction of credit risk from market risk has not been explored in Pakistan which this paper attempts by investigating the impact of market risk on credit risk of the following period. For this study, a panel data of 30 manufacturing firms was collected through random sampling technique from period 2005 to 2016. A regression model was estimated in Generalized Method of Momments and used a Hausman test to select fixed or random effects. Results of this study show that firms have 30% more current liabilities as compared to current assets and experience volatility in stock prices which increases the credit risks. However, research findings shows that firms have reasonable growth opportunities and profitability they can be used to reduce stock volatility and attain confidence of creditors in firms. The increase in leverage due to creditor's confidence in firm indicates a decrease in credit risk. Overall the study shows the significantly negative impact of market risk on credit risk of the subsequent time period which specifies market risk may foresee credit risk of the following period and gives a new understanding for investors and policymakers to curb risks in investment decisions.

Keywords: Market Risk; Credit Risk; Pakistan Stock Exchange; financial statements (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:gss:journl:v:3:y:2018:i:3:p:281-299

DOI: 10.31703/gssr.2018(III-III).16

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