A panel causality analysis of financial risk indicators and industrial firms' performance: evidence from an emerging market

Purpose This study offers an empirical examination of the causal relationship between financial risks and firm performance among industrial firms listed on the Amman Stock Exchange credit risks and financial risk ratios are used to gauge overall financial risk, while the performance measure employed is stock market return. Design/methodology/approach Secondary data were collected from the annual financial statements of Jordanian industrial firms for the period 2009–2022. The generalized method of moments (GMM) was used for coefficient estimation to account for endogeneity and unobserved heterogeneity. Additionally, the panel causality test proposed by Dumitrescu and Hurlin (2012) was applied to determine the direction of causality. Findings The results reveal a homogeneous causal relationship between firm performance and financial risks. Specifically, credit risk, total loans, and short-term debt ratios positively influence stock returns. In contrast, long-term debt and firm size are found to negatively affect market performance. Finally, the quick ratio and liquidity ratio exhibit insignificant effects on stock market return. Practical implications This study provides valuable insights for the management and stakeholders of industrial firms in decision-making processes. Credit risk should be closely monitored, and short-term debt may represent a more effective financial strategy than long-term debt. Originality/value While most prior studies have relied on OLS and fixed effects models to analyze the impact of financial indicators on firm performance, this study is among the first to use a dynamic GMM approach. The findings offer important implications and recommendations for owners and managers of industrial firms, enabling them to assess the risks and opportunities associated with debt financing and to leverage the potential benefits of credit risk management.