Financial conservatism and shareholders' value

Ammara Yasmin, Abdul Rashid and Saba Kausar

Global Business and Economics Review, 2023, vol. 29, issue 2, 229-246

Abstract: Conservative use of leverage makes the firm less susceptible to financial risk. The use of debt is also proscribed as per the Islamic financing approach. On the contrary, dominant theories of finance appreciate the use of leverage to attain higher returns. To solve this puzzle we have empirically examined the long-run performance of firms that use financially conservative policy in Pakistan. This is the first study comparing the long-run performance of financially conservative firms classified into: a business-group affiliated with non-affiliated, dividend-paying with zero-dividend and financial surplus with financial deficit. We have analysed data from 146 non-financial publicly listed companies for a period of 21 years (1998-2018) using the Fama and French three-factor model and the CAPM. The results of this study have strong implications for investors, as we discover that the stocks of financially conservative firms generate positive abnormal returns regardless of any classification.

Keywords: capital structure; net debt ratio; financial conservatism; zero leverage; shareholder’s value; business groups. (search for similar items in EconPapers)
Date: 2023
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