Working Capital Management Efficiency and Corporate Governance in Manufacturing Sector of Pakistan

Abstract

Efficiency in “Working Capital Management” (WCM) has been the key factor of many profitable firms. The purpose of this paper is to examine the impact of characteristics of corporate governance on the WCM efficiency of firms in context of Pakistan. A total of 40 firms listed at Pakistan Stock Exchange (PSX, previously known as Karachi Stock Exchange (KSE)) are selected for the period of 5 years which lead to a total of 200 observations. Cash conversion cycle and current ratio are the main measures of WCM efficiency whereas Chief Executive Officer (CEO) Tenure, CEO Duality, Audit Committee and Board Size are the main measure of corporate governance characteristics. The results state that governance characteristics have significant impact on WCM efficiency. Except CEO Duality, all other independent variables have significant role in explaining WCM efficiency. This paper suggests the management to set policies that favors maintaining the optimal level of working capital. Firms can create value for the shareholders by reducing the investments, however improving efficiency, in working capital. Keeping appropriate size of the board and audit committee, management can improve the WCM efficiency. The findings of this study are also beneficial to investors, company stake holders, and other key intermediaries.