Abstract
Extant empirical studies have predominantly focused on the nexus between working capital management (WCM) and corporate profitability. While there is a dearth of literature on the nexus between WCM and a firm’s risk, the present study examines Pakistani-listed firms coming from 12 diverse industrial segments to observe this association for a time span of ten years (2005–2014). To ensure robustness, we employed a System Generalized Method of Moments (SGMM) regression estimation to investigate the influence of WCM on the operational and market risk for firms. Empirical testing revealed that higher working capital levels were associated with lower volatility in firms’ stock price, which shows that shareholders prefer a conservative working capital policy. Moreover, firms with better cash positions were subject to lesser stock market volatility. In contrast, excess working capital and a larger net trade cycle were associated with increased volatility in the operating income. Besides, firms with lower working capital levels relative to their respective industry experienced fewer fluctuations in their operating profits. Our findings assert that short-term financial management has important ramifications for firms’ operating and market fundamentals. Practical implications are discussed for corporate managers and relevant stakeholders.
Highlights
Working Capital Management (WCM) is one of the major decisions in corporate finance
The present study empirically examined the impact of working capital management of Pakistani firms on their operating and market risk
We found that higher working capital levels are associated with lower volatility in firms’ stock price, which shows that shareholders prefer a conservative working capital policy in the context of Pakistan
Summary
Working Capital Management (WCM) is one of the major decisions in corporate finance. It plays a crucial role in corporate financial sustainability as it can directly impact the firm’s liquidity, solvency, and profitability (Opler et al 1999). A conservative working capital policy might lower these risks Still, it will harm the firm’s performance because a substantial amount of funds will be wedged in inventory and receivables, lowering the firm profitability. The present study empirically examined the impact of working capital management of Pakistani firms on their operating and market risk. As the literature on working capital management predominantly focuses on the operating performance aspect of the firm, very scarce literature has paid attention to how working capital management practices affect the corporate level risk, especially in the context of Pakistan. This study attempts to identify the excessive working capital tied up in Pakistani firms, the historical growth in cash, and other components of working capital These statistics will provide useful information to the corporate managers about the efficiency of working capital and the areas needing improvement.
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