Browse > Article
http://dx.doi.org/10.13106/jafeb.2021.vol8.no11.0223

The Impact of Operating Cash Flows on Financial Stability of Commercial Banks: Evidence from Pakistan  

ELAHI, Mustahsan (Department of Management Sciences, Air University)
AHMAD, Habib (Department of Management Sciences, Air University)
SHAMAS UL HAQ, Muhammad (Department of Management Sciences, COMSATS University)
SALEEM, Ali (Department of Management Sciences, The University of Sialkot)
Publication Information
The Journal of Asian Finance, Economics and Business / v.8, no.11, 2021 , pp. 223-234 More about this Journal
Abstract
This study aims to examine whether operating cash flows influence banks' financial stability in Pakistan. The study employed annual panel data collected from annual reports of 20 commercial banks listed on the Pakistan Stock Exchange for the year 2011 to 2019. Free cash flow yield was taken as the dependent variable while cash flow ratio was selected as the independent variable, and net interest margin, income diversification, asset quality, financial leverage, the cost to income ratio, advance net of provisions to total assets ratio, capital ratio, financial performance, breakup value per share and bank size were taken as control variables. The study performed ordinary least square technique, random and fixed effects models, Hausman test, Lagrange multiplier test, descriptive and correlation analysis. Results showed that operating cash flows and net interest margin significantly and positively influenced banks' financial stability while the cost to income ratio and advances net of provisions to total assets ratio significantly and negatively associated with banks' financial stability. To improve financial stability, banks should become more cost-effective and enhance their liquidity levels by lowering lending activities. In the future, it would be useful to compare commercial and investment banks, also Islamic and conventional banks in the same research setting.
Keywords
Pakistan Stock Exchange; Free Cash Flow Yield; Cash Flow Ratio; Hausman Specification; Lagrange Multiplier;
Citations & Related Records
연도 인용수 순위
  • Reference
1 Ali, M., Sohail, A., Khan, L., & Puah, C.-H. (2019). Exploring the role of risk and corruption on bank stability: Evidence from Pakistan. Journal of Money Laundering Control, 22(4), 270-288. https://doi.org/10.1108/JMLC-03-2018-0019   DOI
2 Ali, M. A., Kalim, U., Raza, H., Ali, H. A., Rehman, M., & Ullah, M. I. (2017). The relationship between ROA, ROE, ROCE, and EPS ratios with break-up values of shares of Karachi-Pakistan fuel and energy listed companies. Journal of Finance and Accounting, 5(3), 115-122. https://doi.org/10.11648/j.jfa.20170503.15   DOI
3 Bernardin, D. E. Y., & Tifani, T. (2019). Financial distress predicted by cash flow and leverage with capital intensity as moderating. Jurnal Apresiasi Ekonomi, 7(1), 18-29. https://doi.org/10.31846/jae.v7i1.188   DOI
4 Abbas, F., Butt, S., Masood, O., & Javaria, K. (2019). The effect of bank capital buffer on bank risk and net interest margin: Evidence from the US. Global Journal of Social Sciences Studies, 5(2), 72-87. https://doi.org/10.20448/807.5.2.72.87   DOI
5 Al-Kharusi, S., & Murthy, S. R. (2020). Financial stability of GCC banks in the COVID-19 Crisis: A simulation approach. The Journal of Asian Finance, Economics, and Business,7(12), 337-344. https://doi.org/10.13106/jafeb.2020.vol7.no12.337   DOI
6 Kwok, H. (2002). The effect of cash flow statement format on lenders' decisions. The International Journal of Accounting, 37(3), 347-362. https://doi.org/10.1016/S0020-7063(02)00171-1   DOI
7 Fung, D. W., Lee, W. Y., Yeh, J. J., & Yuen, F. L. (2020). Friend or foe: The divergent effects of FinTech on financial stability. Emerging Markets Review, 45, 100727. https://doi.org/10.1016/j.ememar.2020.100727   DOI
8 Hassan, M. K., Khan, A., & Paltrinieri, A. (2019). Liquidity risk, credit risk, and stability in Islamic and conventional banks. Research in International Business Finance 48, 17-31. https://doi.org/10.1016/j.ribaf.2018.10.006   DOI
9 Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48(3), 831-880. https://doi.org/10.1111/j.1540-6261.1993.tb04022.x   DOI
10 Jin, L., & Myers, S. C. (2006). R2 around the world: New theory and new tests. Journal of Financial Economics, 79(2), 257-292. https://doi.org/10.1016/j.jfineco.2004.11.003   DOI
11 Guizani, M., & Kouki, M. (2012). Ownership-control discrepancy and dividend policy: Evidence from Tunisia. International Business Research, 5(1), 127. https://doi.org/10.5539/ibr.v5n1p127   DOI
12 Kadioglu, E., & Yilmaz, E. A. (2017). Is the free cash flow hypothesis valid in Turkey? Borsa Istanbul Review, 17(2), 111-116. https://doi.org/10.1016/j.bir.2016.12.001   DOI
13 La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (2000). Agency problems and dividend policies around the world. The Journal of Finance, 55(1), 1-33. https://doi.org/10.1111/0022-1082.00199   DOI
14 Dhaliwal, D. S., Lee, K. J., & Fargher, N. L. (1991). The association between unexpected earnings and abnormal security returns in the presence of financial leverage. Contemporary Accounting Research,8(1), 20-41. https://doi.org/10.1111/j.1911-3846.1991.tb00832.x   DOI
15 Dimitropoulos, P. E., Asteriou, D., & Koumanakos, E. (2010). The relevance of earnings and cash flows in a heavily regulated industry: Evidence from the Greek banking sector. Advances in Accounting, 26(2), 290-303. https://doi.org/10.1016/j.adiac.2010.08.005   DOI
16 Elnahass, M., Trinh, V. Q., & Li, T. (2021). Global banking stability in the shadow of the Covid-19 outbreak. Journal of International Financial Markets, Institutions, and Money, 72, 101322. https://doi.org/10.1016/j.intfin.2021.101322   DOI
17 Fahlevi, M. R., & Marlinah, A. (2018). The Influence of liquidity, capital structure, profitability, and cash flows on the company's financial distress.Jurnal Bisnis dan Akuntansi, 20(1), 59-68. https://doi.org/10.34208/jba.v20i1.409   DOI
18 Gill, B. (2010). Stock market liquidity and firm dividend policy. The Open Business Journal, 3, 8-14. https://doi.org/10.5267/j.msl.2014.6.0452   DOI
19 Burke, Q. L., & Wieland, M. M. (2017). Value relevance of banks' cash flows from operations. Advances in Accounting, 39, 60-78. https://doi.org/10.1016/j.adiac.2017.08.002   DOI
20 Gupta, J., & Kashiramka, S. (2020). Financial stability of banks in India: Does liquidity creation matter? Pacific-Basin Finance Journal, 64, 101439. https://doi.org/10.1016/j.pacfin.2020.101439   DOI
21 Dirman, A. (2020). Financial distress: The impacts of profitability, liquidity, leverage, firm size, and free cash flow. International Journal of Business, Economics, and Law, 22(1), 17-25. https://www.ijbel.com/wp-content/uploads/2020/08/IJBEL22_205.pdf.
22 Adusei, M. (2015). The impact of bank size and funding risk on bank stability. Cogent Economics Finance, 3(1), 1111489. https://doi.org/10.1080/23322039.2015.1111489   DOI
23 Hayn, C. (1995). The information content of losses. Journal of Accounting and Economics, 20(2), 125-153. https://doi.org/10.1016/0165-4101(95)00397-2   DOI
24 Memon, Z. A., Chen, Y., Tauni, M. Z., & Ali, H. (2018). The impact of cash flow volatility on firm leverage and debt maturity structure: Evidence from China. China finance review international 8(1), 69-91. https://doi.org/10.1108/CFRI-06-2017-0106   DOI
25 Platt, H. D., & Platt, M. B. (2002). Predicting corporate financial distress: reflections on choice-based sample bias. Journal of Economics And Finance, 26(2), 184-199. https://doi.org/10.1007/BF02755985   DOI
26 Cai, J. F. (2013). Does corporate governance reduce the overinvestment of free cash flow? Empirical evidence from China. Journal of Finance and Investment Analysis, 2(3), 97-126. http://www.scienpress.com/Upload/JFIA/Vol%202_3_8.pdf
27 Christie, A. A., & Zimmerman, J. L. (1994). Efficient and opportunistic choices of accounting procedures: Corporate control contests. Accounting Review, 69, 539-566. https://urresearch.rochester.edu/
28 Dechow, P. M., Richardson, S. A., & Sloan, R. G. (2008). The persistence and pricing of the cash component of earnings. Journal of Accounting Research, 46(3), 537-566. https://doi.org/10.1111/j.1475-679X.2008.00283.x   DOI
29 Kamran, H. W., Mohamed-Arshad, S. B., & Omran, A. (2019). Country governance, market concentration, and financial market dynamics for banks stability in Pakistan. Research in World Economy, 10(2), 136-146. https://www.sciedu.ca/journal/index.php/rwe/article/view/15882   DOI
30 Kim, H., Batten, J. A., & Ryu, D. (2020). The financial crisis, bank diversification, and financial stability: OECD countries. International Review of Economics & Finance, 65, 94-104. https://doi.org/10.1016/j.iref.2019.08.009   DOI
31 Lin, D., & Lin, L. (2016). How does Corporate Governance Affect Free Cash Flow? Journal of Applied Finance and Banking, 6(3), 145. http://www.scienpress.com/Upload/JAFB/Vol%206_3_10.pdf
32 Martynova, N., Ratnovski, M. L., & Vlahu, M. R. (2015). Bank profitability and risk-taking(Working Paper No. 15/249) Washington DC: International Monetary Fund.https://www.imf.org/external/pubs/ft/wp/2015/wp15249.pdf
33 Nguyen, D. V., Dang, D. Q., Pham, G. H., & Do, D. K. (2020). Influence of overconfidence and cash flow on investment in Vietnam. The Journal of Asian Finance, Economics, and Business, 7(2), 99-106. https://doi.org/10.13106/jafeb.2020.vol7.no4.287   DOI
34 Kim, J. B., Li, Y., & Zhang, L. (2011). CFOs versus CEOs: Equity incentives and crashes. Journal of Financial Economics 101(3), 713-730. https://doi.org/10.1016/j.jfineco.2011.03.013   DOI
35 Miller, M. H., & Modigliani, F. (1961). Dividend policy, growth, and the evaluation of shares.The Journal of Business, 34(4). https://www.jstor.org/stable/2351143
36 Mishkin, F. S. (1992). Anatomy of a financial crisis. Journal of Evolutionary Economics, 2(2), 115-130.   DOI
37 Moussa, F. B., & Chichti, J. (2011). Interactions between free cash flow, debt policy and structure of governance: Three-stage least-square simultaneous model approach. Journal of Management Research,3(2), 1. https://doi.org/10.5296/jmr.v3i2.614   DOI
38 Nguyen, D. D., & Nguyen, A. H. (2020). The impact of cash flow statement on the lending decision of commercial banks: Evidence from Vietnam. The Journal of Asian Finance, Economics, and Business, 7(6), 85-93. https://doi.org/10.13106/jafeb.2020.vol7.no6.085   DOI
39 Pham, M. H., & Doan, T. P. L. (2020). The impact of financial inclusion on financial stability in Asian countries. The Journal of Asian Finance, Economics, and Business, 7(6), 47-59. https://doi.org/10.13106/jafeb.2020.vol7.no6.047   DOI
40 Phan, D. H. B., Iyke, B. N., Sharma, S. S., & Affandi, Y. (2021). Economic policy uncertainty and financial stability-Is there a relation? Economic Modelling, 94, 1018-1029. https://doi.org/10.1016/j.econmod.2020.02.042   DOI
41 Rahman, S. M. K., Chowdhury, M. A. F., & Tania, T. C. (2021). Nexus among Bank Competition, Efficiency, and Financial Stability: A Comprehensive Study in Bangladesh. The Journal of Asian Finance, Economics, and Business, 8(2), 317-328.   DOI
42 Sharma, P., Leung, T. Y., Kingshott, R. P., Davcik, N. S., & Cardinali, S. (2020). Managing uncertainty during a global pandemic: An international business perspective. Journal of Business Research 116, 188-192. https://doi.org/10.1016/j.jbusres.2020.05.026   DOI
43 Rahmawati, R., & Narsa, I. M. (2020). Operating cash flow, profitability, liquidity, leverage, and dividend policy. International Journal of Innovation, Creativity and Change., 11(9), 121-148. https://doi.org/10.13106/jafeb.2021.vol8.no2.0317   DOI
44 Ryan, S. G., Tucker, J. W., & Zarowin, P. A. (2006). Classification and market pricing of the cash flows and accruals on trading positions. The Accounting Review, 81(2), 443-472. https://doi.org/10.2308/accr.2006.81.2.443   DOI
45 Saksonova, S. (2014). The role of net interest margin in improving banks' asset structure and assessing the stability and efficiency of their operations. Procedia-Social Behavioral Sciences, 150, 132-141. https://doi.org/10.1016/j.sbspro.2014.09.017   DOI
46 Khan, A., Kaleem, A., & Nazir, M. S. (2012). Impact of financial leverage on agency cost of free cash flow: Evidence from the manufacturing sector of Pakistan. Journal of Basic and Applied Scientific Research, 2(7), 6694-6700. https://lahore.comsats.edu.pk/Papers/Abstracts/146-8588087134154383308.pdf
47 Watson, D., & Head, A. (2010). Corporate finance: principles and practice. London, UK: Pearson Education.
48 Salami, A. A. (2018). Determining a Better Predictor of Bank's Solvency in Nigeria: Risk-Based Capital or Risk-Independent Capital? Acta Universitatis Danubius Economica, 14(6), 522-546. http://journals.univ-danubius.ro/index.php/oeconomica/article/view/4859
49 Sayari, N., & Mugan, C. S. (2017). Industry-specific financial distress modeling. BRQ Business Research Quarterly, 20(1), 45-62. https://doi.org/10.1016/j.brq.2016.03.003   DOI
50 Subramanya, K., & John, J. (2010). Financial report analysis (10th ed.). Jakarta: Salemba Empat.
51 Titman, S., Wei, K. J., & Xie, F. (2004). Capital investments and stock returns. Journal of Financial and Quantitative Analysis, 39(4), 677-700. https://www.jstor.org/stable/30031881   DOI
52 Xu, M. T., Hu, K., & Das, M. U. S. (2019). Bank profitability and financial stability (Working Paper No. 19/5). Washington DC: International Monetary Fund. https://www.imf.org/~/media/Files/Publications/WP/2019/wp1905.ashx
53 Zhang, Y. (2009). Are debt and incentive compensation substitutes in controlling the free cash flow agency problem? Financial Management 38(3), 507-541. https://doi.org/10.1111/j.1755-053X.2009.01046.x   DOI
54 Benartzi, S., Michaely, R., & Thaler, R. (1997). Do changes in dividends signal the future or the past? The Journal of Finance, 52(3), 1007-1034. https://doi.org/10.1111/j.1540-6261.1997.tb02723.x   DOI
55 Al-Fasfus, F. S. (2020). Impact of free cash flows on dividend pay-out in Jordanian Banks. Asian Economic and Financial Review, 10(5), 547. https://doi.org/10.18488/journal.aefr.2020.105.547.558   DOI
56 Ali, M., & Puah, C. H. (2018). Do bank size and funding risk affect banks' stability? A lesson from Pakistan. Global Business Review, 19(5), 1166-1186. https://doi.org/10.1177/0972150918788745   DOI
57 Atieh, S. H. (2014). Liquidity analysis using cash flow ratios as compared to traditional ratios in the pharmaceutical sector in Jordan. International Journal of Financial Research, 5(3), 146-158. https://doi.org/10.5430/ijfr.v5n3p146   DOI
58 Agyei, S. K., & Marfo-Yiadom, E. (2011). Dividend policy and bank performance in Ghana. International Journal of Economics and Finance, 3(4), 202-207. https://doi.org/10.5539/ijef.v3n4p202   DOI
59 Ali, A., & Zarowin, P. (1992). Permanent versus transitory components of annual earnings and estimation error in earnings response coefficients. Journal of Accounting and Economics, 15(2-3), 249-264. https://doi.org/10.1016/0165-4101(92)90020-3   DOI
60 Das, S. (2019). Cash flow ratios and financial performance: A comparative study. Accounting, 5(1), 1-20. https://doi.org/10.5267/j.ac.2018.6.004   DOI
61 Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323-329. https://www.jstor.org/stable/1818789
62 Jensen, M. C. (1997). Eclipse of the public corporation. Harvard Business Review. https://hbr.org/1989/09/eclipse-of-the-public-corporation
63 Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs, and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X   DOI
64 Ramzan, M., Amin, M., & Abbas, M. (2021). How does corporate social responsibility affect financial performance, financial stability, and financial inclusion in the banking sector? Evidence from Pakistan. Research in International Business and Finance, 55, 101314. https://doi.org/10.1016/j.ribaf.2020.101314   DOI
65 Bourkhis, K., & Nabi, M. S. (2013). Islamic and conventional banks' soundness during the 2007-2008 financial crisis. Review of Financial Economics, 22(2), 68-77. https://doi.org/10.1016/j.rfe.2013.01.001   DOI
66 Harris, C., & Roark, S. (2019). Cash flow risk and capital structure decisions. Finance Research Letters, 29, 393-397. https://doi.org/10.1016/j.frl.2018.09.005   DOI