Relationship Between Risk Management Practices And Financial Performance Of Construction And Construction Related Firms In Pakistan
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Date
2015-02
Authors
ANJUM, MUHAMMAD SHAHZAD
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Abstract
Construction industry plays a vital role in creating employment opportunities for
millions of unskilled and skilled workforce in construction and Construction related
industry firms in developing economies. The dynamic nature of construction industry
and its competitive and risk prone work environment has forced the constituent firms to
continuously seek strategies to minimize the adverse effects of different types of risks
and improve their financial performance. Based on an extensive review of firm
performance models, this study is aimed to introduce an updated Firm Risk Analysis,
Management and Evaluation (FRAME) model for specific analysis of the relationship
between financial performance and risk management practices of construction and
Construction related industry firms in Pakistan. The study has used a two-stage financial
risk analysis and management methodology to ascertain the relationship between firm’s
financial performance and their risk management practices. This has been accomplished,
first, by conducting financial performance analysis based on comprehensive ratio
analysis (using financial data for nine years) and the development of firm and economy
performance scores. Combining these two, a performance index was worked out and
used to select the high and low performing quartiles of firms for the second stage of
analysis. The study then used survey approach to collect industry-specific information
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from seventeen high performing and sixteen low performing firms (showing nearly 80
percent response rate) to determine the level and extent of risk management practices
adopted by high and low performing firms.
The conclusive outcome of the study has been the determination of a significant positive
relationship between risk management practices and financial performance of
construction and Construction related industry firms. This study, first of its kind in
Pakistan and an important contribution to knowledge on linkages between risk
management practices and firm financial performance (a relatively weaker research
area) should be relevant to both researchers and practitioners including construction
industry listed firms, construction contractors, relevant professional bodies and industry
regulators.
Given the highly risky economic situation and the heavy dependence of construction and
Construction related industry firm’s financial performance on the growth pattern of
national economy, the study findings provide empirical evidence on the existence of a
positive relationship between the level of risk management practices and financial
performance of firms and, thus, highlights the need for these firms to develop and
implement better risk management processes and enhance their financial performance by
minimizing the adverse consequences of economic and other fluctuations.
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Keywords
Relationship Between Risk Management Practices And Financial Performance Of Construction , And Construction Related Firms In Pakistan