Academic journal article The Journal of Humanities and Social Sciences

Can Working Capital Cycle or Cash Conversion Cycle Be Factored in Economic Performance of Pakistani Corporate Firms?

Academic journal article The Journal of Humanities and Social Sciences

Can Working Capital Cycle or Cash Conversion Cycle Be Factored in Economic Performance of Pakistani Corporate Firms?

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

The role of working capital management (WCM) is vital in the field of corporate finance. If WCM is not tackled with the needed consideration, it will push the firm towards insolvency and even bankruptcy. As discussed in the literature review that the findings of earlier researches vary, and the variation is brought by changes in time or the place where the study is conducted. Looking at this situation it may not be possible to say anything about the results of the study, but we can expect that WCM will affect performance of firms'.

The study will be beneficial for both academic as well as practical use. This study covers all the firms for a period of 12 years from 2003 to 2014. This study can be more widened by using more current data or using other companies as sample. Managers can use it for analyzing their current way to managing WCM and change it accordingly this may increase performance of their firm. The paper comprises of five sections, Section-1 covers the Introduction, Section-2 is the Literature Review, Section-3 is Methodolgy and Section-4 outlines the stock of data analysis. Section-5 summarizes the conclusions.

Literature Review

There is ample literature on how firms manage the daily operations of a firm. Several authors have explored the multiple dimensions of firms in this regard. These dimensions include the internal and external factors that affect the economic performance of firms. In a very recent study by Cetenak, Vural and Sokmen (2017) an attempt is made to look beyond internal factors that determine working capital for business firms. This study took data from 14 emerging markets and reported that at industry-country level there is a positive relation between working capital and HHI index (used for competition), exchange rate, rule of law, and Lerner Index.

Pais and Gama (2015) find in their study for Portuguese firms that business firms earn better economic profits if they pay their commercial liabilities a little longer and receive their cash receivables earlier. Yazdanfar and Ohman (2014) studied that how cash conversion cycle affects economic performance of Swedish firms and found that cash conversion has a significant impact on business profits. Similar findings are reported by the study of Iqbal, Ahmad and Riaz (2014) which was conducted for listed Pakistani business firms. Napompech (2012) reports after analyzing data for Thai listed firms that in addition to the measures of working capital, industry characteristics also have an impact on the gross profits of firms. There are numerous studies that build relationships between economic performance and measures of working capital.

Alipour (2011) after analyzing data for Iranian firms asserts that cash conversion cycle is the most important efficiency measure for working capital. This study finds that if firms get their receivables longer, they are less profitable and if they convert their inventories faster their economic performance is going to be better than their competition. The study also finds that if firms improve their cash conversion cycle, they will be well-off in terms of profits. Similar findings are reported by other researchers like the finding of an inverse relation between cost of financing and cash conversion cycle of companies with higher leverage, more potential industry by Baños- Caballero et al. (2010) shows the affiliation of WCM and profitability and this study was moderately in consistence with earlier studies about the need of working capital across different industries. It was also found that longer CCC is maintained by older firms and firms having greater cash flow, where as highly leveraged with more opportunity for growth and return on assets preserve more aggressive policies of working capital, and this recommends that cost of supporting has an adverse effect on firm's cash conversion cycle.

Furthermore, investment in capital may increase if access to capital markets is easy. …

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