Does Working Capital Management Affect the Operational Liquidity Position of Firms? A Case of Pakistani Manufacturing Firms

Abstract

The study is aimed to investigate the effect of working capital management on the operational liquidity position of diverse manufacturing firms listed on Karachi Stock Exchange, Pakistan. Descriptive statistics, Pearson’s correlation analysis and Pooled (OLS) analysis techniques are applied on the balanced panel data set of 148 manufacturing firms for the period (Jan. 2006 to Dec. 2011). It is found that tight credit policy, efficiency of inventory management, delayed payment policy and overall efficiency of working capital management have significant positive effect on firm’s operational liquidity position. But conservative strategy of investment in current assets and aggressive strategy of short terms financing are found to have negative effect on operational liquidity position of firms. The study suggested that operational liquidity position of listed manufacturing firms can be improved by using appropriate policies and strategies of working capital management. This study can be extended by investigating the differences in working capital management efficiency and working capital policies across various industries and their effect on various measures of liquidity position of firms.