The Moderating Role of ROA in the PER-Firm Value Nexus: Evidence from Pakistan’s Banking Sector

Abstract

Purpose Firm Value (FA) acts as a key measure of the efficiency of banking institutions in allocating resources and investor confidence in confidence in times of economic uncertainty. This research investigates the impact of investment choices, represented by the Price-to-Earnings Ratio (PER), and tests the moderating effect of profitability, represented by Return on Assets (ROA), on FV in commercial banks in Pakistan. Methodology The research applies panel data from 20 listed commercial banks for the period 2018–2023. Using a Random Effects Model (REM) on panel data diagnostics, the research examines direct and moderating effects of PER and ROA on FV. Findings The results show that neither PER nor ROA has any statistically significant direct effect on FV. Furthermore, ROA does not significantly moderate PER-FV. The findings are indicative of the complexity of value creation in commercial banks and suggest the possibility of other unexplored internal and external variables playing a more significant role in determining firm value. Conclusion The research provides insights to regulators and managers to move beyond conventional measures such as PER and ROA while formulating policies for augmenting firm value in turbulent environments. Practical Implications The management of banks and regulators in Pakistan must reconsider relying on traditional measures of PER and ROA to build firm value in turbulent environments. Further studies are essential in coming up with other untested internal and external factors that play a significant role in the value of firms in the Pakistani business banking industry. Policies to increase the value of a firm should not be limited to concentration on only evidence of PER and ROA as a broader range of indicators offering good results need to be used.