Factors Affecting Working Capital Management Practices and Determining Firms' Performance: A Comparative Analysis of Listed Companies in Pakistan

Abstract

In order to produce good financial results and improve operational performance, a firm should effectively and efficiently manage its working capital. Working capital policies and practices vary from firm to firm which leads to variation in profitability. A difference in working capital practices is observed on the basis of size and location. Review of existing literature indicates that this variation in working capital management practices among various categories of firms such as small, medium, large, domestic and multinationals has not yet been adequately researched, particularly in developing countries like Pakistan. The study uses secondary data of 153 listed firms on Pakistan Stock Exchange for 10 years (2004-2013). These firms are categorized on the basis of size viz. small, medium and large; as well as location such as domestic and multinationals. R-square shows that highest explanatory power of the independent and control variables included in the model based on market to book ratio occur in multinational firms where dependent variable is explained to the extent of 41% whereas based on return on assets it is 26% in medium firms. Results show that working capital policy significantly affects firms’ performance. Multinomial logistic regression model was used to identify factors significantly affecting WC policy. Logistic regression results show that ROA and MC are the variables determining the WC policy of firms significant at 5% and 1% respectively. Overall, correct predictions for the study employing logistic regression model work out to be 71.9% showing fitness of the model used for analysis.