Does Working Capital Management Affect the Operational Liquidity Position of Firms? A Case of Pakistani Manufacturing Firms
DOI:
https://doi.org/10.1956/jge.v9i1.285Keywords:
Working Capital Management, Operational Liquidity Position and Manufacturing FirmsAbstract
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.
References
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Ahmad, N., Azim, P. and Rehman, UR. J. (2012). Does working capital management affect the operational liquidity position? A case of Pakistani manufacturing firms. Journal of Global Economy, 8(4), 327-352.
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Dittmar, A., Smith, J. M., and Servaes, H. (2002) Corporate Liquidity (Unpublished working paper). Indiana University London Business School.
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Ganesan V. (2007). Analysis of working capital management efficiency in telecommunication equipment industry. Rivier Academic Journal, 3(2), Fall.
Gentry, J. A., Vaidyanathan, R. H. W. Lee, H.W. (1990). A weighted cash conversion cycle. Financial Management, 19(1), 90-99.
Gill, A., Nahume, B. and Mathur, N. (2010). Relationship between working capital management and profitability: Evidence from 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.
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Kim C S., Mauer, D.C. and Sherman, A. E. (1998). The determinants of corporate liquidity: Theory and evidence. The Journal of Financial and Quantitative Analysis, 33(3), 335-359.
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.
Mueller, F. W., Jr. (1953). Corporate working capital and liquidity. The Journal of Business of University of Chicago, 26(3): 157-172.
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.
Rao, R. K. S. (1989). Fundamentals of financial management (3rd ed.) Macmillan Inc.
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., Afza,T., Qayyum, A. and Bodla M.A. (2010).Working Capital Management and Corporate Performance of Manufacturing Sector in Pakistan. International Research Journal of Finance and Economics,47, 151-163.
Ross S. A., Westerfield R.W., Jaffe J.F. (2008). Modern financial management (8th ed.). New York: Mc Graw-Hill Publishing Company.
Samiloglu, F. and Demirgunes, 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.
Sayaduzzaman Md (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. and ORUC, 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.
Smith V.K. (1973). State of the art of working capital management. Financial Management,2 ( 3), 50-55.
Smith, M., Beaumont, and Begemann, E. (1997). Measuring association between working capital and return on investment. South African Journal of Business Management, 28(1).
Soenen, L. A. (1993). Cash conversion cycle and corporate profitability. Journal of Cash Mnagement, 13(4), 53-58.
Stickney, C. P. (1996). Financial reporting and statement analysis (3rd ed.), Forth Worth: Dryden Press.
Tewolde, S.(2002). Working capital management: The case of government, transitional, and privatized manufacturing firms in Eritrea. Doctoral dissertation, University of Groningen, Faculty of Management, http://dissertations.ub.rug.nl/faculties/.
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.
Ahmad, N., Azim, P. and Rehman, UR. J. (2012). Does working capital management affect the operational liquidity position? A case of Pakistani manufacturing firms. Journal of Global Economy, 8(4), 327-352.
Brealey, R. A. and Meyers, S. C. (2008). Principles of corporate finance (International ed.). New York: McGraw-Hill Publishing Company.
Chandra, P. (2007). Fundamentals of financial management (7th ed.). Tata McGraw-Hill publishing company.
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.
Dittmar, A., Smith, J. M., and Servaes, H. (2002) Corporate Liquidity (Unpublished working paper). Indiana University London Business School.
Eljelly. A. M.A. (2004). Liquidity - profitability trade off: An empirical investigation in emerging markets. International Journal of Commerce and Management, 14(2), 48 - 61.
Ganesan V. (2007). Analysis of working capital management efficiency in telecommunication equipment industry. Rivier Academic Journal, 3(2), Fall.
Gentry, J. A., Vaidyanathan, R. H. W. Lee, H.W. (1990). A weighted cash conversion cycle. Financial Management, 19(1), 90-99.
Gill, A., Nahume, B. and Mathur, N. (2010). Relationship between working capital management and profitability: Evidence from 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 (12th ed.). New Yark: Addison Wesley Publishers.
Horne, V. J. C., and Wachowicz J. M., (2008), Fundamentals of Financial Management (13th ed), New Delhi, Pearson Education.
John, A. T. (1993). Accounting Measures of Liquidity, Leverage, and Cost of Financial Distress. Financial Management, 22 (3), 91-100.
Kim C S., Mauer, D.C. and Sherman, A. E. (1998). The determinants of corporate liquidity: Theory and evidence. The Journal of Financial and Quantitative Analysis, 33(3), 335-359.
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.
Mueller, F. W., Jr. (1953). Corporate working capital and liquidity. The Journal of Business of University of Chicago, 26(3): 157-172.
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.
Rao, R. K. S. (1989). Fundamentals of financial management (3rd ed.) Macmillan Inc.
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., Afza,T., Qayyum, A. and Bodla M.A. (2010).Working Capital Management and Corporate Performance of Manufacturing Sector in Pakistan. International Research Journal of Finance and Economics,47, 151-163.
Ross S. A., Westerfield R.W., Jaffe J.F. (2008). Modern financial management (8th ed.). New York: Mc Graw-Hill Publishing Company.
Samiloglu, F. and Demirgunes, 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.
Sayaduzzaman Md (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. and ORUC, 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.
Smith V.K. (1973). State of the art of working capital management. Financial Management,2 ( 3), 50-55.
Smith, M., Beaumont, and Begemann, E. (1997). Measuring association between working capital and return on investment. South African Journal of Business Management, 28(1).
Soenen, L. A. (1993). Cash conversion cycle and corporate profitability. Journal of Cash Mnagement, 13(4), 53-58.
Stickney, C. P. (1996). Financial reporting and statement analysis (3rd ed.), Forth Worth: Dryden Press.
Tewolde, S.(2002). Working capital management: The case of government, transitional, and privatized manufacturing firms in Eritrea. Doctoral dissertation, University of Groningen, Faculty of Management, http://dissertations.ub.rug.nl/faculties/.
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
25.03.2013
How to Cite
Ahmad, N., Azim, P. and Rehman, J. ur (2013) “Does Working Capital Management Affect the Operational Liquidity Position of Firms? A Case of Pakistani Manufacturing Firms”, Journal of Global Economy, 9(1), pp. 53–68. doi: 10.1956/jge.v9i1.285.
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