**4. Empirical Analysis**

In Table 3, the mean value of financial performance represents the same trend and we find a lesser variation in values of financial performance measures which proves there is no outlier in our data. We further find that most of the firms are producing more than one product. In this competitive environment, it is necessary for manufacturing firms to expand their business for their survival. The firms do not pay a regular dividend to their investors as well as the average per share dividend is also very low. Results also indicate that this sector relies more on debt financing as compared to equity financing. In addition, an increase in debt structure results in the lowest return on assets. Therefore, opting for the diversification strategy, this sector needs to take a risk by increasing debt financing which helps to increase value. This sector is also growing in terms of fixed asset investments. Corporate governance is still at a growing stage in South Asian countries. The audit committee meets four times in a year. In addition, the average number of members of an audit committee are three. We find that more than one-third of the firms ge<sup>t</sup> their accounts audited with the big four audit firms. The average board size is around eight members and that shows a weak governance system. We further found that a lesser percentage of CEOs are acting as chairperson of the board. Sales growth shows a growing trend in the sales volume of this sector. Table 4 represents the correlation values to check the multicollinearity.


**Table 3.** Descriptive Statistics.

Note: ROA is Return on Assets, ROE is Return of Equity, TQ is the Market Return, PD is Product Diversification, GD is Geographic Diversification, CS is Capital Structure, DP is Dividend Policy, IP is Investment Policy, ACA is Audit Committee Activity, ACSIZE is Audit Committee Size, AQ is Audit Quality, BSIZE is Board Size, CEOD is CEO Duality, AGE is Years of Activity of the Firm, GRTH is Sales Growth, SIZE is the Natural Log of Total Assets.

Table 5 explains the hypotheses testing through two-step dynamic panel regression. We categorize corporate diversification into two parts; product diversification and geographic diversification; therefore, we run three models for each one of the dependent variable in the analyses. In the first model, we analyze the impact of independent variables on firms' financial performance with product diversification. In the second model, we investigate the impact of independent variables on firms' financial performance with geographic diversification, whereas, in the third model, we run the analysis with product diversification as well as geographic diversification. We find that product diversification has a significant and positive impact on Return on Equity and Tobin's Q while it only has an insignificant impact on Return on Assets in the third model. An insignificant relationship suggests that highly diversified firms may not attract shareholders. Adamu et al. (2011) explain that if firms want to enhance financial performance, they should adopt a focused strategy. We find that geographic diversification has a significant and positive impact on Return on Assets, whereas it has a significant and negative impact on Tobin's Q. In addition, geographic diversification has an insignificant impact on ROE. The insignificant impact of corporate diversification is due to the reason that revenues from diversification are offset by extra expenses with respect to diversification (Hengartner 2006).

Varying results of diversification strategy justify the inefficient utilization of resources (Gao and Chou 2015). The reason for the negative impact of geographic diversification on Tobin's Q is that an inefficient corporate governance system induces managers to expand their business for personal benefits that have a negative impact on the firms' financial performance (Phung and Mishra 2016). This reason is in line with the Agency Theory of Jensen and Meckling (1976). We find that dividend policy significantly influences the firms' financial performance, which is according to the Bird in Hand Theory of Gordon (1963). The theory explains that dividend policy affects the firm's value. We find that dividend policy has a significant and positive impact on Return on Assets, whereas, it has a significant and negative impact on Tobin's Q. Negative impact shows that dividend payments reduce retained earnings of the firms. Further, dividend policy has an insignificant impact on Return on Equity in second and third models. The positive impact of dividend policy on financial performance is similar to the results of Butt et al. (2010) and Ali et al. (2015).


**Table 4.** Correlation Analysis.


**Table 5.** Two-step System Dynamic Panel Regression (Overall Sample).

Note: \*\*\*, \*\* and \* represent levels of significant at 1%, 5% and 10%. *p*-values are shown in parentheses. ROA is Return on Assets, ROE is Return of Equity, TQ is the Market Return, PD is Product Diversification, GD is Geographic Diversification, CS is Capital Structure, DP is Dividend Policy, IP is Investment Policy, ACA is Audit Committee Activity, ACSIZE is Audit Committee Size, AQ is Audit Quality, BSIZE is Board Size, CEOD is CEO Duality, AGE is Years of Activity of the Firm, GRTH is Sales Growth, SIZE is the Natural Log of Total Assets.

The reason for the insignificant impact of dividend on financial performance variables is that manufacturing firms do not follow a regular pattern of dividend payments. Capital structure has a significant and negative impact on Return on Assets while it has a significant and positive impact on Tobin's Q. In addition, capital structure has a significant and negative impact on Return on Equity in the first and third models. Investment policy shows an insignificant impact on Return on Assets and Return on Equity while it has a significant and negative impact on Tobin's Q in the second and third models. The insignificant impact of investment policy is similar to the results of Kotšina and Hazak (2012). The reason for the insignificant impact is that firms fix the new selling prices of their goods by considering the changes in variable expenses and ignoring fixed expenses. There is also a general phenomenon that firms produce their products in large volume. As a result, there is a decrease in the unit cost of production. Due to this, any change in investment does not affect financial performance.

The analysis shows mixed results regarding the impact of corporate governance and audit quality on firms' financial performance. This is due to the weak and inefficient governance system in South Asian countries. The board size has an insignificant impact on firms' financial performance. The insignificant results of board size are similar to the results of Hunjra et al. (2016). We find that CEO duality has insignificance but a negative impact on financial performance. We find that the audit committee size has significance and a positive impact on Tobin's Q in the second and third model only. Positive effects of audit committee size on financial performance follow the Resource

Dependence Theory that states a positive relationship between audit committee size and the firms' financial performance (Pearce and Zahra 1992). Audit committee activity has an insignificant impact on the firms' financial performance. Reasons for the inconsistent and insignificant impact of audit committee activity and audit committee size are the very small variation in audit committee activity and audit committee size of the firms that do not affect financial performance. We find that audit quality has significance and positive impact on Tobin's Q only. For the other two measures of financial performance, audit quality has an insignificant impact. The reason for varying results is that each one of the selected countries has a different quality of audit professionals.

Tables 6 and 7 deal with the analysis of an individual country. It states that product diversification has a significant and positive impact on all measures of financial performance for Pakistan and that shows improvement in product development of firms in Pakistan. The positive effects also follow Markowitz (1952) portfolio theory which explains that firms can reduce risk and increase output if they diversify their resources. In addition, product diversification significantly but negatively affects the financial performance of the firms in India which shows agency issues are more prevailing in firms as well as underutilization of assets of the firms. For Sri Lanka and Bangladesh, product diversification shows mixed and inconsistent outputs but the general trend shows that product diversification has a significant impact on financial performance. Geographic diversification has a significant impact on financial performance for the firms of all individual countries of our study. Generally, the impact is positive which shows improvement in product quality and more acceptability in foreign markets. Furthermore, the impact is negative when we measure financial performance as Return on Equity. The reason for the negative impact of geographic diversification on financial performance is that multinational firms have inefficient innovation as compared to domestic firms and this low level of innovation explains adverse effect of geographic diversification on financial performance (Gao and Chou 2015).

There are inconsistent results with respect to dividend policy and capital structure for all selected countries. This is because the stock market is not efficient and the debt market is also in developing phase in these countries. There is inconsistent pattern of paying the dividend as well as generating long-term loans. Firms mostly rely on bank loans. Therefore, the capital structure of firms in Pakistani and Sri Lanka shows significant impact on the firms' financial performance, but the impact is negative. The negative impact of capital structure on the firms' financial performance is in line with the results of Vatavu (2015). The capital structure of Indian firms has a significant impact on all measures of financial performance. The results show that firms in India implement capital structure decisions properly. For Bangladesh, the impact of capital structure on firm's financial performance is significant and positive that shows a development of the loan market in Bangladesh.

Investment policy shows mixed results in all selected countries. For Pakistani firms, investment policy has a significant and negative impact on Return on Assets, but the impact is significant and positive on Tobin's Q. For Indian firms, investment policy has a significant and positive impact on Return on Assets, while it has a significant and negative impact on Tobin's Q. The investment decision is a significant determinant of financial performance for Sri Lanka, but the impact is negative on Return on Equity. For firms in Bangladesh, investment policy has a significant and positive impact on Tobin's Q. For the other two measures of financial performance, investment policy has varying outputs for each one of the models of the analysis. The negative impact of CEO duality follows Resource Dependence Theory, which explains the lack of concentration. In general, corporate governance and audit quality mechanisms show mixed findings. We can link these findings with Institutional Theory, which argues that firms might follow regulations or practices of corporate governance in order to increase financial performance. The insignificant effects of corporate governance variables are similar to the results of Chen et al. (2008) and Dar et al. (2011).



Note: \*\*\*, \*\*, and \* represents levels of significant at 1%, 5%, and 10%. *p*-values are shown in parentheses.



Control variables show that firm age has a significant and negative effect on firms' financial performance. It shows that when firms ge<sup>t</sup> older, they start losing concentration of managing their assets, hence they start devastating their financial performance. Results show that in general, firm growth has a significant and positive impact on financial performance. Firm size has a negative and significant and negative relationship with Return on Assets but it has a significant and positive impact on Tobin's Q. Further, size has an insignificant impact on Return on Equity. Negative and insignificant impact of size shows that manufacturing firms of South Asian countries fail to utilize economies of scale, and they do not meet market requirements of economic efficiency. In a separate analysis of each country, control variables show varying findings but in the majority of the analyses, it shows significant outputs. However, the use of different measures of financial performance and three models for each one of the financial performance measure in our study reconciles the varying outputs.
