An Empirical Investigation of Linkage between Working Capital Management and Profitability: Panel Data Evidence from Bangladesh Pharmaceutical Industry

Abstract

The study is an endeavor to investigate the empirical and significant association between working capital and the profitability of pharmaceutical companies operating in Bangladesh. To serve the analysis mostly secondary level data have been employed. The study has been used balanced panel data of 16 selected pharmaceutical companies listed in Dhaka Stock Exchange (DSE) and covering seven years annual data from 2011 to 2017. To diagnosis the ties between working capital management on profitability the study have been used return on assets and gross profit margin (proxy variable of profitability) as dependent variable and days sales outstanding, days payable outstanding, days inventory outstanding, cash conversion cycle, working capital turnover, current ratio, quick ratio, debt ratio and size as independent variable. Fisher Type Unit root test has been employed to check stationary properties of panel data and found that there are no unit roots in taken panels at the 1% statistical significance level. Breusch-Pagan/Cook-Weisberg test has been employed to investigate the degree of heteroscedasticity and the significant evidence suggests that the data of the study is out of heteroscedasticity problem. Cameron & Trivedi's decomposition of IM-test also suggests that the variance is homogenous. Variance inflation factor (VIF) has been investigated the degree of multicollinearity and revealed that all variable except quick ratio (QR) and current ratio (CR) has a lower degree of multicollinearity. To analyses balanced panel data, the study has been employed two multiple regression model and used fixed and random effect model for proper estimation. Hausman specification test has been used to detect the alternative panel analysis methods. Results indicate that out of 9 independent variables only day’s cash conversion cycle (CCO), current ratio (CR), quick ratio (QR) and working capital turnover (WCT) shows a significant relationship with return on assets of the taken sample of pharmaceutical companies. Results also indicate that out of 9 independent variable only days sales outstanding (DSO), quick ratio (QR) and debt ratio (DR) shows a significant relationship with gross profit margin of the taken sample.