Does Working Capital Management Influence Operating and Market Risk of Firms?

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.

Impact of Working Capital Management on Firm’s Performance: Evidence From Automobile Sector

“…Thus, depending on the industry and the environment in which an organisation works, there are a range of connections between WCM strategies and company performance. According to Akbar, Akbar, Nazir, Poulová and Ray (2021), after-global-financial-crisis WCM policies of majority of organisations suggest that short-term financial goals are prioritized above long-term ones. According to GMM approach, a concave connection exists between WCM practices and firm performance.…”

“…To achieve these goals, it is essential that each component be well managed to optimize working capital. Working capital management is therefore a managerial concern (Akbar et al, 2021). A crucial aspect of effective working capital management for any business is ensuring that short-term obligations are thus fulfilled on schedule and long-term assets are adequately insured.…”

Prevention of Financial Risk: Cash and Inventory as a Catalyst for Working Capital Management for Lifelong Learning of Small-Scale Operators

“…The primary purpose of WCM is establishing that a firm has sufficient cash on hand to fulfil its short-term operational expenses and debt commitments. WCM strategies have been linked to risk exposure (Akbar et al, 2021). In the same vein, appropriate WCM entails managing and monitoring short-term assets and short-term liabilities to enable firms reduce the risk of failure to satisfy short-term commitments and investing substantially in cash reserves.…”

“…Cash management strategies were investigated by Faque (2021), such as the stochastic cash management model, accelerating cash collections, centralising as well as decentralising management, diversifying the asset portfolio and disbursing funds. Financial managers must strike a balance between liquidity and profitability in order to ensure that the company's activities are productive and profitable (Akbar et al, 2021). Inventory management might suffer from ineffective cash management.…”

A Theoretical Assessment on the Relationship between Working Capital Investment and Firm's Performance

“…Working capital is a fundamental accounting scheme targeting at the provision of an appropriate proportion between a business's current assets and liabilities. An efficient approach in managing working capital improves companies to meet up with its pecuniary commitments as well expand their revenues generation capacity as working capital investment (WCI) is a dynamic feature of firm's financial management; this relation is crucial in corporate backgrounds (Akbar et al, 2021). Banos-Caballero et al (2020) states that working capital safeguards the firm liquidity position.…”