The impact of economic downturns on the profitability: Evidence from textile sector of Bangladesh

The textile industry in Bangladesh, contributing to more than 80% of export earnings for the country, has experienced two major economic shocks within the past five years: the Covid-19 pandemic in 2020 and labour strikes across the country, which led to a decline in GDP in 2023. This study examines the impact of economic downturn of Bangladeshi-listed textile companies on profitability. This study uses panel data from the annual reports of 46 textile companies listed on the Dhaka Stock Exchange (DSE) in Bangladesh, comprising 230 observations for the period 2019–2023. The one-step system generalised method of moments (GMM), a dynamic panel estimator designed to address profitability persistence and potential endogeneity, was used to analyse the relationship. The economic downturn was quantified using a categorical variable, assigning a value of 1 for periods experiencing an economic downturn and 0 otherwise, and profitability was measured using return on assets (ROA), return on equity (ROE), and earnings per share (EPS). ROA and ROE were estimated via the GMM, while EPS could not be validly estimated via GMM and is reported only as an indicative fixed-effects result. The findings revealed that the profitability of Bangladeshi textile enterprises is adversely affected by economic downturn. These findings underscored that economic downturn pose a serious threat to the financial sustainability of Bangladeshi textile firms. The study contributes to the literature by extending evidence on multiple economic downturn episodes in Bangladesh's textile sector, demonstrating the relevance of dynamic system GMM for profitability analysis, and applying the Resource-Based View to firm-level resource characteristics in a downturn-affected emerging-market context. This work enhances previous research and provides more reliable causal insights than static panel models by using GMM. The research findings will assist financial professionals, investors, and the government in making business decisions during periods of economic downturn.