Research On The Relationship Of Working Capital And The Profitability Of Pakistan Manufacturing Firms

This study analyzes the impact of working capital on operating profit of Pakistan manufacturing firms.By employing panel least squares estimation,panel fixed effect,and panel generalized method of movement;the research finds a significant curvilinear relationship between working capital and operating profit.Further,it confirms that a positive working capital is negatively influenced the operating profit and a negative working capital is influenced the operating profit positively.This study also segregates the firms into financial constrained and less-constrained firms.The research investigates that the constrained firms hold a lower level of working capital to run the routine business operations.The lower level of working capital reduces the short term financing cost which may enhance the positive effect of working capital on operating profit.Whereas,the less-constrained firms have abundant of internal funds and lower cost of financing.The less-constrained firms maintain a higher level of working capital to increase sales revenues.The higher level of working capital increases the interest expenses and opportunity cost which enhances the negative effect of working capital on operating profit.The study has also examined the moderating role of cash between the relationship of working capital and operating profit.The interaction term of (WCR*CHR)has been used both in positive and negative working capital groups to analyze the impact of cash holding on the profitability.The interaction term(WCR*CHR)develops the negative effect on operating profit in the positive working capital group,while in the negative working capital group,the interaction term(WCR*CHR)develops the positive impact on operating profit.The inverse effects of interaction term of(WCR*CHR)both in positive and negative working capital groups indicate that cash plays a moderating role and affect the relationship of working capital with profitability.In addition,the moderating role of cash has also been tested in financially constrained and less-constrained firms.The research reveals that financially constrained firms hold a negative working capital and the positive cash holding.The negative working capital reduces the short term financing cost,and positive cash holding reduces the bankruptcy cost of the firms.The interaction term of negative working capital and positive cash holding has(WCR*CHR)develops a positive relationship with operating profit.In contrast,the less-constrained firms maintain a higher level of working capital and a lower level of cash holding due to the lower cost of external funds.The higher level of working capital increases the opportunity cost,and the lower level of cash holding increases the bankruptcy cost of firms.The results indicate that the interaction term of positive working capital and negative cash holding(WCR*CHR)develops a negative relationship with operating profit in less-constrained firms.In addition,the study has also examined the relationship between working capital and operating profit of Pakistan manufacturing firms in the presence of exports destinations.The Pakistan manufacturing firms have been segregated into the firms'exports on more stable economies and exports on less-stable economies as compared to the home economy.The study reveals that firms'exports on more stable economies than home economy maintain a higher level of working capital to fulfill the demand of foreign customers and to avoid the risk of the shortage of product in the international market.The results indicate that a higher level of working capital of exports firms on stable economies is negatively affected the operating profit.On the other hand,the firms are exports on less-stable economies than home economy maintain a lower level of working capital.The lower level of working capital of exports firms on less-stable economies is positively affected the operating profit.Moreover,the working capital of exports firms on stable economies and exports on less-stable economies has been divided into positive and negative working capital groups in stable economies.Similarly,the working capital of less-stable economies has been divided into positive and negative working capital groups of exports firms in less-stable economies.The study reveals that both the positive and negative working capital in stable and less-stable economies develops the inverse relationship with operating profit respectively.