Financial Adaptability and Firm Performance Under Macroeconomic Shocks: Evidence from a Commodity-Dependent Emerging Economy

This study examines the relationship between firms’ financial adaptability and performance during periods of macroeconomic stress. Using panel data on companies listed on the Mongolian Stock Exchange from 2015 to 2024, the analysis measures financial adaptability through a Firm Adaptability Index (FAI) constructed from observable indicators of liquidity, coverage capacity, and asset-use efficiency. The index is constructed using principal component analysis (PCA) to avoid arbitrary equal-weighting assumptions, and the debt ratio is deliberately excluded to prevent multicollinearity with the leverage control variable used in the regression models. The empirical framework primarily relies on panel regression models with interaction terms, supplemented by a DID-style comparison and an event-study-based diagnostic. The validity of the quasi-experimental design is confirmed by a formal parallel-trend test and placebo checks using artificial shock dates. The findings do not support the view that financial adaptability exerts a uniformly strong and stable direct effect on firm performance across all conditions. Instead, its empirical relevance becomes more visible when macroeconomic conditions worsen. In particular, the interaction result related to interest rates suggests that firms with higher levels of financial adaptability tend to exhibit less pronounced profitability sensitivity to financing cost pressure. Additional analyses point to short-term liquidity buffers as a plausible channel and show that the strength of this relationship varies by firm size and sectoral characteristics. This study contributes to the literature by bringing together the related concepts of financial flexibility, organizational resilience, dynamic capabilities, and strategic adaptability within a firm-level empirical setting. It also proposes a practical way to measure financial adaptability not through a single proxy, but through a composite index that integrates several observable financial dimensions. Overall, the evidence suggests that financial adaptability is better understood not as a constant determinant of profitability, but as an internal capability whose relevance becomes more apparent under conditions of heightened uncertainty.