Abstract
We examine the impact of efficient working capital management on market value and profitability. Using secondary data on selected firms from Dhaka Stock Exchange we explore the effects of various working capital components (i.e. cash conversion cycle (CCC), current ratio (CR), current asset to total asset ratio (CATAR), current liabilities to total asset ratio (CLTAR), debt to asset ratio (DTAR), siz,e and growth) to the firm’s performance by looking firm’s value i.e. Tobin’s Q (TQ) and profitability i.e. return on asset (ROA) and return on invested capital (ROIC). Our results show that, for both food and overall manufacturing sectors, there is a significant association between working capital variables and firm’s value & return on assets, but an insignificant association with return on invested capital.
Highlights
Working capital management (WCM) is as important as long-term capital management in adding values to share holders’ wealth and in any firm’s sustained performance
This shows that the lower current ratio will increase the firm performance which supports the all alternative hypothesis, the changes in Tobin’s Q (TQ), return on asset (ROA) and return on invested capital (ROIC) can be explained by changes in CACLR
The regression result for CATAR indicates a positive association with ROA and negative insignificant association with TQ and ROIC indicating that any increase in CATAR will increase ROA and decrease in CATAR will increase TQ & ROIC and support alternative hypothesis
Summary
Working capital management (WCM) is as important as long-term capital management in adding values to share holders’ wealth and in any firm’s sustained performance. It is no difference for firms in developing economies where, inefficiency in working capital management can have significant negative impact in firm’s profitability, liquidity management, and overall performance. Most of the previous empirical research has focused on the working capital determinants (e.g., Garcia-Teruel & Solano, 2010; Anagnostopoulou, 2012), policy practices (e.g., Afza & Nazir, 2007; Pandey, Gupta &Perera, 1997; Perera, & Wickremasinghe, 2010; Bei & Wijewardena, 2012) and relationship between WCM and accounting performance of companies (e.g., Deloof 2003; Padachi 2006). We add to the current literature by studying the impact of working capital management on firm’s market value and profitability of Bangladeshi companies
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