Does Working Capital Management Affect the Profitability? A Case of Pakistani Manufacturing Firms
DOI:
https://doi.org/10.1956/jge.v8i4.271Keywords:
Working capital management policies, Profitability, Panel analysis and fixed effect and random effect models.Abstract
This study investigates the effect of working capital management on profitability of 148 diverse manufacturing firms listed on Karachi Stock Exchange, Pakistan for the period January 2006 to December 2011. The fixed effect and random effect models results revealed that firms’ aggressive strategy of financing negatively affect the profitability. Moreover, tight credit policy, efficiency of stock-in-trade management, early payment policy and conservative strategy of investment in current assets are found to have significant positive effect on profitability of firms. Findings of the study suggested that profitability of firms can be improved by devising optimal working capital management policies and also emphasized the investigation of factors that must be considered by management while formulating appropriate working capital management policies.
References
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Nwankwo, O. and Osho,G.S. (2010). An empirical analysis of corporate survival and growth: Evidence from efficient working capital management. International Journal of Scholarly Academic Intellectual Diversity, 12,1-13.
Padachi.K. (2006).Trends in working capital management and its impact on Firms’ performance: An analysis of Mauritian small manufacturing firms.International Review of Business Research Papers, 2 (2), 45-58.
Raheman, A. and Nasr, M. (2007).Working capital management and profitability – Case of Pakistani firms.International Review of Business Research Papers,3(1), 279-300.
Raheman, A., Talat, A., Abdul, Q. and Mahmood, A. B. (2010).Working Capital Management and Corporate Performance of Manufacturing Sector in Pakistan.International Research Journal of Finance and Economics,47, 151-163.
Samiloglu, F. andDemirgunes, K. (2008).The effect of working capital management on firm profitability: Evidence from Turkey.The International Journal of Applied Economics and Finance, 2(1), 44-50.
SayaduzzamanMd (2006). Working capital management: A study on British American Tobacco Bangladesh Company Ltd.The Journal of Nepalese Business Studies,3(1), 78-84.
Sen, M. andOruc, E. (2009).Relationship between efficiency level of working capital management and return on total assets in ISE.International Journal of Business and Management, 4(10), 109-114.
Shin, H.H and Soenen, L. (1998).Efficiency of working capital management and corporate profitability.Financial Practice and Education, 8(2), 37-45.
Smith K. V. and Sell B. S. (1980). Working capital management in practice: In the readings on management of working capital (51-84),.Edited by Smith K. V. West Publishing Company.
Uyar, A. (2009). The relationship of cash conversion cycle with firm size and profitability: An empirical investigation in Turkey.International Research Journal of Finance and Economics, 24, 187-193, fromhttp://www.eurojournals.com/finance.htm
Van Horne J. C., and Wachowicz J. M., (2008), Fundamentals of Financial Management (13th ed),New Delhi,Pearson Education.
Zariyawati, M. A., Anwar, M.N.,Taufiq, H. and Rahim, A.S.A. (2009).Working capital management and corporate performance: Case of Malaysia. Journal of Modern Accounting and Auditing, 5(54), 47-54.
Asselbergh, G. (1999). A strategic approach on organizing accounts receivable management: Some empirical evidence.Journal of Management and Governance, 3, 1-29.
Asteriou, D. (2006). Applied econometrics (1sted.). United States of America, Palgrave: Macmillan Publishers.
Brooks, C. (2008). Introductory econometrics for finance, (2nded.).U.K. Cambridge University Press.
Chandra, P. (2007). Fundamentals of financial management (7thed.). Tata McGraw-Hill publishing company.
Chen. K. H. and T.A Shimerda, T.A. (1981). An Empirical analysis of useful financial ratios.Financial Management,10(1), 51-60.
Chowdhury, A. and Amin, Md. M. (2007).Working capital management practiced in pharmaceutical companies listed in Dhaka Stock Exchange.BRAC University Journal, 2, 75-86.
Deloof, M. (2003).Does working capital management affect profitability of Belgian firms? Journal of Business Finance & Accounting, 30 (3)&(4), 573 - 587
Ganesan V (2007). Analysis of working capital management efficiency in telecommunication equipment industry.Rivier Academic Journal, 3(2),Fall.
Gill, A., Nahume, B. andMathur, N. (2010).Relationship between working capital management and profitability:Evidencefrom the United States.Business and Economic Journal, 2-9 BEJ-10. http://astonjournals.com/bej
Gilmer R.H. (1985). The optimal level of liquid assets: An empirical test. Financial Management, 14(4), 39-43.
Gitman, L.A (2009). Principles of managerial finance (12thed.). New Yark: Addison Wesley Publishers.
Gugarati, D.N. (2004). Basic econometrics (4thed.) USA, McGraw-Hill Co.
John, A. T.(1993).Accounting Measures of Liquidity, Leverage, and Cost of Financial Distress.Financial Management,22 (3), 91-100.
Joshi, P. V. (1995). Working capital management under inflation (1sted.). Anmol publishers.
Lyroudi, K.and Lazaridis, J. (2000).The cash conversion cycle and liquidity analysis of the food industry in
Greece.http://papers.ssrn.com/paper.taf?abstract_id=236175.
Martani, D., Mulyono, Khairurizka, R. (2009). The effect of financial ratios, firm size and cash flow from operating activities in the interim report to the stock return.Chinese Business Review, 8 (6), 44-55.
Mathuva, D. M. (2009). The influence of working capital management components on corporate profitability: A survey on Kenyan listed firms.Research Journal of Business Management, 1-11.
Nwankwo, O. and Osho,G.S. (2010). An empirical analysis of corporate survival and growth: Evidence from efficient working capital management. International Journal of Scholarly Academic Intellectual Diversity, 12,1-13.
Padachi.K. (2006).Trends in working capital management and its impact on Firms’ performance: An analysis of Mauritian small manufacturing firms.International Review of Business Research Papers, 2 (2), 45-58.
Raheman, A. and Nasr, M. (2007).Working capital management and profitability – Case of Pakistani firms.International Review of Business Research Papers,3(1), 279-300.
Raheman, A., Talat, A., Abdul, Q. and Mahmood, A. B. (2010).Working Capital Management and Corporate Performance of Manufacturing Sector in Pakistan.International Research Journal of Finance and Economics,47, 151-163.
Samiloglu, F. andDemirgunes, K. (2008).The effect of working capital management on firm profitability: Evidence from Turkey.The International Journal of Applied Economics and Finance, 2(1), 44-50.
SayaduzzamanMd (2006). Working capital management: A study on British American Tobacco Bangladesh Company Ltd.The Journal of Nepalese Business Studies,3(1), 78-84.
Sen, M. andOruc, E. (2009).Relationship between efficiency level of working capital management and return on total assets in ISE.International Journal of Business and Management, 4(10), 109-114.
Shin, H.H and Soenen, L. (1998).Efficiency of working capital management and corporate profitability.Financial Practice and Education, 8(2), 37-45.
Smith K. V. and Sell B. S. (1980). Working capital management in practice: In the readings on management of working capital (51-84),.Edited by Smith K. V. West Publishing Company.
Uyar, A. (2009). The relationship of cash conversion cycle with firm size and profitability: An empirical investigation in Turkey.International Research Journal of Finance and Economics, 24, 187-193, fromhttp://www.eurojournals.com/finance.htm
Van Horne J. C., and Wachowicz J. M., (2008), Fundamentals of Financial Management (13th ed),New Delhi,Pearson Education.
Zariyawati, M. A., Anwar, M.N.,Taufiq, H. and Rahim, A.S.A. (2009).Working capital management and corporate performance: Case of Malaysia. Journal of Modern Accounting and Auditing, 5(54), 47-54.
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Published
04.01.2013
How to Cite
Ahmad, N., Azim, P. and Rehman, J. ur (2013) “Does Working Capital Management Affect the Profitability? A Case of Pakistani Manufacturing Firms”, Journal of Global Economy, 8(4), pp. 327–344. doi: 10.1956/jge.v8i4.271.
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