Impact of macroeconomic factors on firm performance: Empirical evidence from India

Abstract

Understanding the macroeconomic factors is essential for all firms operating in the economy. Investment decisions, financing decisions, and risk management of firms are influenced by the existing macroeconomic factors, thereby impacting their performance. This paper examines the effect of macroeconomic factors on the performance of Indian manufacturing firms. Two-step generalized method of moments model is applied in this investigation to analyze the effect of firm performance from the financial year 2004-05 to 2021-22. Firm performance is proxied by two accounting-based measures and a market-based measure, namely, return on assets, return on equity, and Tobin’s Q, respectively, while the macro-economic factor is proxied by annual gross domestic product growth rate. The empirical findings show that firm performance has a positive relationship with macroeconomic factors. In addition, the findings reveal that firm size, firm age, leverage, sales growth, and operating profit impact firm performance. The study further extends to examine the moderating effect of financing constraints (measured by firm size and age) on macroeconomic factors and firm performance. The results show that the effect is more pronounced on small and young firms as compared to large and mature firms. The study also evaluates the impact of macroeconomic factors on firm performance excluding the crisis periods (the financial crisis of 2008 and the COVID-19 pandemic) and finds the impact on the market performance to be insignificant during non-crisis periods. This study recommends that lenders, managers, and other stakeholders should take proactive policy measures for any anticipated adverse changes in macroeconomic factors on the performance of Indian firms. AcknowledgmentsThe financial and infrastructural support provided by FORE School of Management, New Delhi, India in completing this paper is gratefully acknowledged.