The Endogeneity Quagmire Empirical Evidence from Telecommunication Industry of Pakistan

Purpose: The current research aims to analyze the particular quagmire of endogeneity by considering panel data with the renowned challenge of limited periods. Design/Methodology/Approach: More specifically, the empirical methodology is applied to a novel sector of Telecommunications in Pakistan by analyzing the possible relationship between Operational Risk and a Telecommunication company’s financial performance. The efficacy of the results is further tested by additional tests of GMM. Operational risk in the study is proxied with three variables. Performance is measured in terms of Returns with respect to Equity holders and Total Assets. From the point of view of management, Asset utilization is also used as a proxy for financial performance. Findings: Results show a presence of a significant and a negative relationship between operational risk and management performance and returns, thereby emphasizing the importance of operational risk management for enhanced performance in light of the theory of performance frontiers introduced by Schmenner and Swink in 1998. Implications/Originality/Value: The results suggest that the focus on operational risk management should be revitalized if the firms seek improved performance and a sustainable competitive advantage.