MEDIATING AND MODERATING ROLE OF INVESTMENT EFFICIENCY AND INVESTMENT SCALE BETWEEN FINANCIAL FLEXIBILITY AND FIRM PERFORMANCE: EVIDENCE FROM NON-FINANCIAL SECTOR OF PAKISTAN

There are lot of drivers available for determining financial performance but in the recent era, the most crucial one is financial flexibility. Financial flexibility enhances the firm`s investment ability and leads towards better investment. The aim of the study is to inspect the mediating and moderating role of investment efficiency and investment scale between financial flexibility and firm performance. Financial flexibility is measured by index based on the cash holdings, advantage and financial health, which is measured by Z-score. Proxy that is used for measurement of investment scale is growth in non-cash assets and investment efficiency is measured using Richardson (2006) model. Proxy of return on assets is used to measure firm performance. Control variables firm size and leverage are measured by natural log of assets and debt to assets ratio respectively. For the research purpose 103 non-financial companies registered on Pakistan Stock Exchange are selected. Six years data from 2013-2018 is used for analysis purpose. Descriptive statistics, regression with correlation and other appropriate panel data econometrics techniques are used for data analysis. Regression results shows that financial flexibility is a determinant of firm performance. It means that financially flexible firms have better firm performance than non-financially flexible firms. Moreover, results show that there is no indirect relation between financial flexibility and firm performance. As both the mediating variables investment scale and investment efficiency failed to mediate between financial flexibility and firmperformance. The results further show that investment scale moderate the impact of financial flexibility towards firm performance. It negatively moderate with financial flexibility towards firm performance. On the contrary, investment efficiency failed to moderate the relation between financial flexibility and firm performance. This research is proved to be noteworthy and very helpful for the corporate sector while making capital structure decisions in order to improve the firm performance by maintaining financial flexibility.