Impact of Macroeconomic and Firm-Specific Determinants on Profitability of Manufacturing Firms in Pakistan

Abstract

This study analyses the impact of macroeconomic and firm-specific variables on profitability of manufacturing firms in Pakistan from 2005 to 2022. The profitability analysis is performed through return on assets (ROA) and the Method of Moments Quantile Regression (MMQR) is used for analyzing the effect of the variables in the various quantiles of profitability. The macroeconomic variables are real gross domestic product (GDP), a measure of inflation in producer prices (PPI), and real effective exchange rate (REER). Firm-specific variables are: the size of the firm, asset turnover, liquidity, and leverage. The results show that real GDP positively and significantly influences the profitability of all the firms at all quantiles. On the other hand, REER negatively impacts ROA, especially at higher quantiles. The effects of the firm specific variables on profitability are positive for firm size, asset turnover and liquidity, and it is significantly negative for leverage. The findings indicate that a stable macro-economic environment based on a regime of economic expansion, relatively stable inflation and moderation in exchange rate fluctuations is required for improving the profitability of the manufacturing sector in Pakistan. In addition, the companies should streamline the operation, enhance the liquidity management, and refrain from over-dependence on debt financing so as to achieve sustainable growth and competitiveness.