Is Bankruptcy Risk Tied to Corporate Life-Cycle? Evidence from Pakistan
Round 1
Reviewer 1 Report
Both bankruptcy risk measures, i.e. Altman's Z-score and Zmijewski Score, are constructed with financial ratios, while the firm specific explanatory variables are also based on some variation of these financial ratios. Thus, there is a potential problem of endogeneity if both dependent and the explanatory variables are based on the financial statement observations from the same period. One simple way to address this issue is to use the lagged financial ratios as the explanatory variables.
Rather than using Altman's Z-score and Zmijewski Score, why not use the real bankruptcy as the dependent variable, at least as another robustness check? One can always use the lagged the life-cycle variables and lagged financial ratios as the explanatory variables.
Why not include the transitions of life-cycle stage as the explanatory variables in the regressions? Such transitions capture the non-linear relationship between company bankruptcy and the life-cycle stages.
Please fix the Table 6 Panel-A. some cells are cut off.
Author Response
Thank you for the valueable suggestion. We have addressed this issue. Please see lines 258-259.
Our dataset of 301 firms over 2005-2014 period suggests that these firms may have bankruptcy risk but are operational. Therefore, actual bankruptcy for these firms is irrelevant. Further, we do not have data for actual corporate bankruptcies in Pakistan for which one may consider investigating the subject matter. Furthermore, discussions with practitioners suggest that there are not many bankruptcies in Pakistan in the recent years. This means even if we try to gather data, we may not have a good sample size. Due to these reasons, we may not be able to incorporate actual bankruptcies in the current study. However, we will take advantage of your suggestion in our future work by investigating the actual bankruptcies.
Thank you for the valueable suggestion. We have addressed this issue. Please see lines 470-483.
Author Response File: 
Author Response.docx
Reviewer 2 Report
Corporate Life cycle and Bankruptcy Risk: Insights from a Developing Economy
In this paper, the authors analyze the relationship between bankruptcy risk (dependent variable) and the corporate life cycle in Pakistan from 2005 to 2014. For this purpose, they run a Hierarchical Linear Mixed Model (HLM) for a sample of 301 non-financial listed firms in 12 different sectors.
In general, the paper fit the scientific paper standard, but some revision is required.
Here are some comments and suggestions:
· Maybe the title should be rewrite, highlighting that the study refers exclusively to this specific country:
o Corporate life cycle and Bankruptcy risk: Evidence from Pakistan
But also, if you want to make the title more attractive you can use:
o Is Bankruptcy risk tied to corporate life cycle? Evidence from Pakistan.
· The abstract should be reduced (the first four lines should be relocated in the introduction). If I were you, I would start writing “In this paper we analyze the relationship between bankruptcy risk and the corporate life cycle in Pakistan from 2005 to 2014. For this purpose, we run a Hierarchical Linear Mixed Model (HLM) for a sample of 301 non-financial listed firms in 12 different sectors. The empirical outcomes reveal that firms during…”
· The introduction is well structured but there is no sense to make a headline 1.1 “Why Pakistan” it should be eliminated and integrated into the main text (maybe in the line 78, “For this purpose, we use a sample of non-financial listed firms of Pakistan. We focus on this developing economy because….)
· In the second headline (Literature review), the hypotheses should be enounced at the end of the literature review, consecutively and written in a more homogeneous way, considering the shake-out stage as the benchmark stage:
o H1: Firms face the highest bankruptcy risk at the introduction stage of life cycle.
o H2: Growth firms face lower bankruptcy risk than those at the introduction stage of life cycle.
o H3: Mature firms face the lowest bankruptcy risk.
o H4: Firms face bankruptcy risk at the decline stage of life cycle.
Most of authors in the literature use only four main life cycle stages: birth, growth, maturity and decline (maybe is better than 5)
· Headline 3 Research Design is too long! Maybe it is better to split it up into 2 separate ones:
3. Research design (description of dependent variable, independent ones, etc.)
4. Data, Sample and Methodology.
· Table 1 is less informative than a pie chart, indicating the % of each portion…
· In Figure 1 the pie charts should be used as well. In this point authors should explain which method is used to classify the sample firms into the main life cycle stages (Is it Dickinson method?)
· The methodological approach HLM should be more motivated and better explained against alternative panel data analysis, for example.
· The time horizon is set from 2005 to 2014. Since the financial crisis arose in 2008, if you split the temporary window into two periods differentiating between before crisis and after crisis, how sensitive the results could be depending on such periods?
· Although the study is well-designed, the conclusions could be limited because:
o Most of the firms in the sample (52.49%) are concentrated in Textile and Chemical sectors.
o Most of the firms in the sample (43%) are mature firms.
· Some literature to be considered:
o Koh, SzeKee & Durand, Robert B. & Dai, Lele & Chang, Millicent, 2015. "Financial distress: Lifecycle and corporate restructuring," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 19-33.
o Mokhova N.& Zinecker M. (2013), “Liquidity, probability of bankruptcy and the corporate life cycle: The evidence from Czech Republic”, International Journal of Globalisation and Small Business 5(3) https://doi.org/10.1504/IJGSB.2013.054912
o Maranjory M. & Keykha S. (2016) Evaluation of the Effect of Company's Life Cycle on the Cost of Equity, Modern Applied Science; Vol. 10, No. 12.
Best regards,
Author Response
Thank you for the valueable suggestion. We have changed the title.
Thank you for the valueable suggestions. We did the following:
1. Abstract has been revised.
2. Introduction revised.
3. Hypotheses now placed together at the end of the literature review.
4. Pie charts are added.
5. Headline changed.
6. Suggested literature added.
We appreciate your observation about four stages. However, we preferred Dickinson’s cash flow perspective due to its dynamic nature that allows the firms to move from a later stage to an earlier stage. Dickinson’s framework puts forward shake-out stage (5th) for all those cases where cash flow patterns do not fit in theoretical specification of the cash flows. As such, we observe that effectively there four stages but any observation that do not fit in the definition of these four stages is labelled as shake-out.
We appreciate your observation about Financial crisis. However, this split will reduce the sample size that may have implications for statistical significance of our results. We are working on another larger dataset of multiple countries. We shall take advantage of your suggestion in that study.
Author Response File: Author Response.docx
Round 2
Reviewer 1 Report
The revision on methodology is appropriate.
Author Response
Thank you, we appreciate it.
