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Re-Examining Working Capital Management and Firm Performance Nexus: Does Investment Policy Matter?

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  • Muhammad Amin Hasan
  • Ali Sajid
  • Aman Abbas Ghouri
  • Talal Ahmed Khan

Abstract

Financial crises and macroeconomic imbalances have recently posed serious challenges to firms operating in developing countries. Thus, firms require efficient working capital management (WCM) to remain profitable. The purpose of this study is to examine the impact of WCM on firm performance (FPR) of ‘Food & Personal Care Industry’ of Pakistan using balanced panel data of 22 listed firms for the period of 2006 to 2022. Further, the study estimates the moderating effects of investment policy (IP) on WCM- FPR relationship. The study has used return on assets to measure FPR, while WCM is measured by a comprehensive measure of cash conversion cycle (CCC) comprising accounts receivable period (ARP), accounts payable period (APP), and inventory period (ITP). The findings reveal that CCC and ITP have a significant negative association with FPR, suggesting shorter CCC and ITP increase FPR. However, ARP and APP are positively associated with FPR, suggesting efficient utilization of ACR and delay in payment bills may increase FPR. Moreover, the results show that IP negatively moderates the impact of all components (except APP) of WCM on FPR. These results imply that a conservative IP mitigates the adverse impact of liberal WCM practice on FPR. The study also discussed the useful implications for managers and policymakers along with limitations of the study in the conclusion section.

Suggested Citation

  • Muhammad Amin Hasan & Ali Sajid & Aman Abbas Ghouri & Talal Ahmed Khan, 2023. "Re-Examining Working Capital Management and Firm Performance Nexus: Does Investment Policy Matter?," Journal of Economic Impact, Science Impact Publishers, vol. 5(3), pages 269-278.
    • Handle: RePEc:adx:journl:v:5:y:2023:i:3:p:269-278
    DOI: 10.52223/econimpact.2023.5312
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