DOES WORKING CAPITAL MANAGEMENT AFFECT CORPORATE PROFITABILITY?
Abstract
Managing working capital efficiently and effectively is critical for modern organizations as it directly affects firm’s profitability, liquidity and riskiness. A vast majority of empirical studies have focused on developed countries whereas in case of developing countries like Pakistan it is somewhat under researched. The economy of Pakistan is passing through challenging times with rising inflation, energy crisis, poor law and order etc. Therefore, the purpose of the study was to investigate whether working capital policies adopted by listed organizations within the sugar industry of Pakistan (PSX) are efficient or not in these challenging conditions and what kind of effect (positive or negative) they have on the profitability of the firm. Data from 2006 to 2015 was collected for this study and Ordinary Least Squares (OLS) technique was used to analyse the effect of working capital management on firm profitability. Empirical results of the study show that all four components of working capital used in this study have statistically significant and negative relationship with firm’s profitability.Â
References
Abuzayed, B. (2012). Working capital management and firm’s performance in emerging markets: the case of Jordan. International Journal of Managerial Finance, 8(2), 155-179.
Afza T., & Nazir, M.S. (2007). Is it better to be aggressive or conservative in managing working capital? Paper presented at Singapore Economic Review conference (SERC) on August 02-04, Singapore.
Blinder, A.S. & Maccini, L.J. (1991). The resurgence of inventory research: what have we learned? Journal of Economic Surveys, 5, 291–328
Christopher, S. B., & Kamalavalli, A. L. (2009). Sensitivity of profitability to working capital management in Indian corporate hospitals.
Corsten, D. & Gruen, T., (2004). Stock-outs cause walkouts. Harvard Business Review, 82, 26–28.
Deloof, M. (2003). Does Working Capital Management Affects profitability of Belgian Firms? Journal of Business Finance & Accounting, 30(3), 306-686.
Ek, R. & Guerin, S. (2011). Is there a right level of working capital? Journal of Corporate Treasury Management, 4, 137–149.
Eljelly, A. (2004). Liquidity-Profitability Trade-off: An empirical Investigation in an Emerging Market. International Journal of Commerce & Management, 14(2), 48 – 61.
Fazzari, S.M. & Petersen, B.C. (1993). Working capital and fixed investment: new evidence on financing constraints. RAND Journal of Economics, 24, 328–342.
Ganesan, V. (2007). An analysis of working capital management efficiency in telecommunication equipment. Industryrivier Academic Journal, 3(2).
Kamath, R. (1989). How useful are common liquidity measures? Journal of Cash Management, 24-28
Kieschnick, R., Laplante, M., & Moussawi, R. (2013). Working capital management and shareholders' wealth. Review of Finance, 17, 1827–1852.
Lazaridis, I., & D. Tryfonidis, (2006). Relationship between Working Capital Management and Profitability of Listed Companies in the Athens Stock Exchange. Journal of Financial Management and Analysis, 19 (1), 26 – 35.
Samiloglu, F., & Demirgunes, K. (2008). The Effect of Working Capital Management on Firm Profitability: Evidence from Turkey. The International Journal of Applied Economics and Finance, 4 (4).
Shah, F.A., & Khan, W. (2012). Impact of Working Capital Management on Profitability: A Case of Pakistan Textile Industry. City University Research Journal, 3(1).
Shin, H., & Soenen, L. (1998). Efficiency of Working Capital and Corporate Profitability. Financial Practice and Education, 8(2), 37–45.
Singhania, M., Sharma, N. & Rohit, J.Y. (2014). Working capital management and profitability: evidence from Indian manufacturing companies. Decision, 41(3), 313-326.
Summers, B. & Wilson, N. (2002). Trade credit terms offered by small firms: survey evidence and empirical analysis. Journal of Business and Accounting, 29, 317–335.
Van Horne, J.C., & Wachowicz, J.M. (2006). Fundamentals of Financial Management, 12thEd. Prentice Hall.
Wang W. (2002). “Liquidity management, operating performance and corporate value: evidence from Japan and Taiwanâ€. Journal of Multinational Financial Management, 159- 169.
Zaman, K., Haq, I., Sohail, M., & Alam, Z. (2011). The relationship between working capital management and Profitability: A case of Cement Industry of Pakistan. Mediterranean Journal of Social Sciences, 2(2).
Downloads
Published
Issue
Section
License
Submission of an original manuscript to the Journal will be taken to mean that it represents original work not previously published, that it is not being considered elsewhere for publication. And if accepted for publication, it will be published in print and online and it will not be published elsewhere.
The journal main policy reflects in its stance that the publication of scholarly research is exclusively meant to disseminate knowledge and not-for-purposes.
Copyright Statment
Sarhad Journal of Management Sciences is published by Sarhad University of Science and Information Technology Peshawar. This copyright statement entails that all contents (including text, tables, graphs, images, or any materials that is part and parcel of a research article submitted to the journal) belong to/ property of the person who owned it prior to submission this journal. Publication of the submitted article will not affect the ownership of copyright of the subject materials. SJMS and its users benefit from a general licence over all content submitted under a Creative Commons CC-BY licence over all content. However, content which is not part of the submitted article, is the property of SJMS. In a nutshell, the combination of all content on the SJMS website, the look and feel of the website, is the property of Sarhad University of Science and Information Technology Peshawar.
As an author or contributor, you grant permission to others to reproduce your articles, including any graphics and third-party materials supplied by you, in accordance with the SJMS Terms and Conditions. The licence granted to third parties over all contents of each article, including third-party elements, is a Creative Commons Attribution ("CC BY") licence. The current version is CC-BY, version 4.0 (http://creativecommons.org/licenses/by/4.0/), and the licence will automatically be updated as and when updated by the Creative Commons organisation.
You may include a requirement to reproduce copyright notices but you may not restrict the right to reproduce the entire article, including third-party graphics. This means that you must obtain any necessary third-party consents and permissions to reproduce third-party materials in your articles submitted to SJMS.
Copyright Statement updated September 13, 2022.
