Literature on corporate finance has traditionally focused on the study of long-term financial decisions.
Researchers have examined, in particular, the investment decisions, capital structure, dividends or company valuation
decisions, among other topics. However, short-term assets and liabilities are important components of total assets and need to
be carefully analyzed. Management of these short-term assets and liabilities warrants a careful investigation
because working capital management plays an important role in a firm's profitability as well as its value (Smith, 1980).
The optimum level of working capital is determined, to a large extent, by the methods adopted by the
management. Continuous monitoring is required to maintain optimum levels of various components of working capital, such as
cash receivables, inventory and payables. In line with the studies of Afza and Nazir (2007 and 2008), the present
study examines the factors that determine the working capital requirements of the firms. For this purpose,
a study of 132 manufacturing firms from 14 industrial groups that were listed on Karachi Stock Exchange (KSE) between the
period 2004-2007 was undertaken. While the working capital requirement was used as the dependent variable,
various financial and economical factors, such as operating cycle of the firm, level of economic activity, leverage, growth of
the firm, operating cash flows, firm size, industry, return on assets and Tobin's q, were used as the determining factors
of working capital management. Regression analysis was carried out on the panel data for 132 non-financial firms
over a period of nine years. Finally, the study suggests some policy implications for the managers and investors of
Pakistani markets. |