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This study based to examine the traditional working capital policies of seventeen listed industries in Karachi stock exchange from 1998-2003.their working capital policies and return are investigated by least square regression model.in this study it is found that they have different working capital and financial policies,that is constant from six years.finally we found conservative aspects in working capital and financial policies as well as negativity in profits.. By this,we can better understand the Pakistani stock market,s working capital and financial policies.
This literature mainly concerns long term financial decisions.in this study, researchers mainly focus/investigate on capital, dividend policies,valuation of industries,assets and liabilities(specially short term assets and liabilities).a firm,s value,risk and profitability depends on working capital of that industry. A firm determines the working capital managerial policy for financial decisions with high level of current liabilities from total and may take up low level current assets out of total.extreme level of current assets may have negative effect on profits and low level of current assets have less liquidity,may it becomes stock-out.it causes the operation complexity of firm.
The success of any business depends on working capital value of a firm.excessive working capital is adopted to better manage the current assets,liabilities,inventory,cash receivables and payables.a firm may reduced long term assets investment(by leasing and renting the fixed assets ) but cannot use this policy in working capital. As we have more current assets as we get more liquidity in firm. Before this study ,there is no any research shown on this topic in Pakistan.this study show the importance of working capital in any firm.this shows the traditional relationship between working capital and financial policies. main objectives related to this study are given below:
- Firstly to study the working capital policies in different firms.
- Analyze the determination,that working capital remain constant over long period of time.
- Establish the traditional working capital policies in firm and see whether these policies go with each other?
- Examine their overall impacts on the profitability of a firm.
Literature review and hypothesis development:
many researchers have different views on financial ratios,some take it as specific and other take it as part of working capital.some past studies shows the differences in financial ratios of different industries in the issues of leverages,liquidity,value,activity and profitability.extension to this study,facts shows the constant cross sectional stability grouping for manufacturers and retailors.one researcher in this study develops seven classification of ratios.he said that it were stable over 17 years.
In 1991 a research is held in a hospital to show the grouping between a hospital and a industry.as a conclusion it is found that they have no grouping between them.in an another study it stresses on fixed assets investment in both managerial and research activities.it takes little attention but higher yield.he also examined it for 4 years on a firm and results shows that,this said approach followed by a firm for whole time.
A research in 2005 through light on efficient working capital ratios.the findings shows the differences in these ratios and changes in working capital practices as time passes.
In a regional study,a research is held on working capital policies and actions in private sector in Sri Lanka.data was gathered from interviews and questionnaires from chief financial officers of that particular companies.they found in study that mostly companies in Sri Lanka have informal working capital policies and company sizes influences on both(formal or informal).approaches they used are conservative,moderate or aggressive.for the profitability of a firm they were used planning and control on working capital .
In 1998 another research based on aggressive and conservative working capital policies.their study data based on ten industries to shows the differences and relations between different working capital policies.they conclude that all firms have different policies of working capital whereas relative nature have stable policies.it also shows the negative relationship between a firm assets and liabilities.they found that aggressive working capital assets policies(high return and high risk) is balanced to the conservative working capital financial policies(lower return and lower risk).
1980 study based on current asset investment,which have low risk and low return.in 1998 other research shows the relationship between working capital and profitability of a firm.
In 2003 a study is held that is,a firm can increase their profitability by reducing their inventories and account receivables due.in 2005 it is suggested that firm can get more value by reducing no of days of receivables and inventories.
in 2006,an investigation is held to show the impact of working capital on profitability of a firm by examine the 94 Pakistani firms listed in (ISE).he studied the variables of inventory turnover,average collection period,average payment period and cash statements etc.they conclude that all they have negative relationship between working capital and profitability of above firms.
We tested the hypothesis in the above study is given below:
H1: Difference of working capital among different firms.
H2: working capital policies are stable by time.
H3: aggressive working capital go with aggressive financial policies.
H4: aggressive working capital related to a firms profitability.
Variables and methodology:
in aggressive investment policy(AIP),to measure their degree minimum level investment in current assets versus fixed asset is used.
in aggressive financing policy(AFP),aggressive policy utilize high current liabilities and
Less long term debt whereas financing policy used more long term debt and capital it
Is measured by total current liabilities over Total assets.
in working capital policies profitability is measured by (ROA )and (ROE) as well as TCA/TA and TCL/TA have been averaged.after that estimate a regression model on it.
Samples and data:
the study analyzes the working capital management policies and their impact on the profitability of Pakistani firms.all are listed in Karachi stock exchange as non financial firms.firms with negative equity and negative profitability are removed from this list.annual data of firms will get and annual report data will get from state bank of Pakistan.
in statistical analysis,form and draw the tables.in table 1 present the descriptive analysis of 263 public limited companies listed in KSE.the TCA/TA and TCL/TA ratios are averaged.variation of these ratios are standard deviation.no of companies vary from 4 to 47.main value of above ratios range from 0.443 to 0.661 except cement and leather and tanneries on extreme value of 0.316 and 0.85.variation is less than 0.1 except 1.32 of transportation and communication.above ratio average is near to 0.50 except cable & electrical sector and leather and tanneries.variations in financing policies are more than investment policies and half of industries have standard deviation near 0.1.
All differences in conservative and aggressive policies has been tested by one way AOVA and results are presented in table.resulting value of F -test is 5.11 Which is significant at 1% indicate that there is differences between aggressive and conservative industrial practices.to calculate mean value TCA/TA ANOVA is compared to least significant differences(LSD) test on paired sample basis.in 136 pairs 65 are statistically significant.concluded that there is differences in working capital policies of various firms from both ANOVA and LSD test .
ANOVA and LSD have applied to TCL/TA ratio to examine the differences in financial policies.results are in table 3.F-statistic is 2.151 significant at 1% which indicates the differences of working capital financing policies in firms.it is clear that significant differences can exist in working capital and financing policies but the differences among ANOVA and LSD are broader.by table 2 and 3 we can accept our 1st two hypothesis which states the differences among working capital policies in different industries.
once the differences are explored,next is to examine their stability. mean industry value for TCA/TA is calculated for each firm and for each year.then base year 1998 compared to above ratio of each succeeding year.firms also ranked on the basis of total current liabilities /total assets also comapred to base year.correlation cofficient or z value is in table 4.results shows that industries maintain degree of working capital investment TCA/TA and financing policies TCL/TA.they have strong correlation and value is significant at 1% level .as a result of this we can accept our third hypothesis states that working capital policies are stable over time.
The main objective of this to determine how aggressive policy corresponds to aggressive financing policies.for validation year to year analysis conducted.industries rank from low to high.to rank a firm from low to high TCA/TA ratio used of 1st year(ascending order of degree is used),for high to low TCL/TA ratios used to an ascending order.rank order correlation performed on these policies for 1st year and all other succeeding years .final result will shown in table 5.
There is positive correlation between investment and financing policies which follow aggressive working capital financing policies.so we cant reject the H4 hypothesis states that investment policy accompanied by aggressive financing policy.ROA and ROE shows the impact of conservative working capital policies on profitability of firm.table 6 is the result of regression analysis and t significant at 1% level.
The positive coefficient of TCA/TA shows negative relationship.higher the stated ratio,there is negative return on assets.there is same relationship between TCL/TA and TCA/TA and indicate the coefficient of 0.155 and -0.153.
Results of both regression are significant and shows the result more broader and consistent where F value and coefficient are highly significant .therefore H5 is rejected which states direct relationship between aggressive working capital policies and a firm profitability.
This study shows the relationship between aggressive and conservative working capital policies of 17 KSE listed companies.this study found that different firms have different working capital investment and financing policies constant over six years.positive correlation in investment and financing policies of industries indicates that those have investment working capital policies also follows working capital financing policies.these results show negative correlation between asset management and financing policies as well as between profitability ,degree of aggressiveness of working capital investment and financing policies and their yield shows negative return if they follow working capital policy.their impact shown by two ordinary least square models(OSL).