FINANCIAL RISK MANAGEMENT AND THE CORPORATE FIRM VALUE: AN EMPIRICAL INVESTIGATION USING NON-FINANCIAL LISTED FIRMS IN INDIA

Abstract

This paper empirically examines the impact of financial risk management on firm value using a sample of non-financial firms listed in India. Financial risks examined within the study include financial leverage, liquidity, foreign exchange risk, and interest-based financial risk. Balanced panel data used in the empirical part of the paper consist of 250 firms listed on the BSE and NSE for the years FY 2015-16 to FY 2024-25, yielding 2,500 firm-year observations. Tobin’s Q was used to measure firm value. Panel EGLS (Estimated Generalized Least Squares) technique with cross-sectional weights was used to test the impact of financial risk management on firm value. Results show an inverted U-shaped relation between financial leverage and firm value that is statistically significant. The turning point is observed at a debt-equity ratio of 1.01:1, implying that financial leverage increases firm value until the turning point, but financial leverage beyond the turning point reduces firm value. The research also finds that liquidity, foreign exchange risk management, and interest coverage have a positive and significant impact on Tobin’s Q. Furthermore, firm size also positively influences firm value. Generally, the results of the study provide evidence to the effect that proper financial risk management is a key aspect that is vital for ensuring financial stability and value creation. These results are useful for those interested in financial risk management and value creation in India.