Cracking the Code: Hidden Choices and Visible Impacts Pattern Recognition in Corporate Finance

Amjad Ali () and Suresh Kumar Oad Rajput ()
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Amjad Ali: University of York
Suresh Kumar Oad Rajput: Chain Sys Corporation

Asia-Pacific Financial Markets, 2025, vol. 32, issue 4, No 4, 1243-1282

Abstract: Abstract Research in corporate finance suffers from bounded rationality due to static modeling. Adopting factor analysis, an unsupervised machine learning approach, and balance sheet information (accounts) over time, we find underlying dynamic latent corporate finance decisions. Our study identifies three latent corporate finance decisions adopted by executives in Pakistan, (1) long-term capital investment, (2) short-term debt credit, and (3) financial flexibility. The order of the decisions and the empirical tests highlight agency problems rooted in familial ownership concentration. We find that long-term capital investment and short-term debt credit decisions significantly reduce the firms’ present and future performance. Conversely, managers do not embrace financial flexibility, despite its ability to improve performance. The study highlights a contradiction, firms bounded by ownership concentration prefer control over performance and do not make decisions to optimize and protect minority shareholders’ wealth, depicting a moral hazard problem.

Keywords: Latent accounting variation; Financial flexibility; Factor analysis; Firm value; Stock returns; Firm cash flows; Firm earnings; Cluster regressions; Firm size; Machine learning (search for similar items in EconPapers)
JEL-codes: G21 G23 G31 O16 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10690-024-09487-2

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