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Introduction:

Background of the study:

Corporate financial management deals with basic three decisions for the purpose to get

firm financial goals. These decision consist on capital budgeting, capital structure and

working capital management .As postulated by firer et al (2008), the three core area of

corporate finance are 1st one, capital budgeting, which deal with long term investments

of the firm 2nd one, Capital structure, which deal with debt and equity finance of the firm

and 3rd one, working capital management, which deals with current assets and

liabilities of the firm. Among these factors Working capital management is considers one

of the most important factor for the firm.

Working capital management is the management of current assets and current

liabilities of the firm .The inventory ,account receivables and cash are consider current

assets and account payable and short term dues are consider current liabilities.

Bratland and Hornbrinck (2013), found that Current assets consist on

inventory ,account receivables ,cash and current liabilities consist on account payable

and sort –term borrowing. Further, Working capital management is simply the

management of firm's current assets and current liabilities at most favorable level. The

theme of working capital management is to maintain balance of working capital. Study

conducted by Nazir and Afza (2009), the main purpose of working capital management

is to keep the current assets and current liabilities an optimal level. According

Filbeck and Krueger (2005), the aim of working capital management is to hold an

Optimum balance of each of working capital. The main objective of working capital
management is to keep the current assets and current liabilities at most favorable level

(Gill,2011).

According to Filbeck and Krueger (2005) Nazir and Afza (2009), and Gill (2011) the

main purpose and objective of working capital management is to maintain working

capital at most favorable level. Reference to the above statements the firm should

maintain the amount of current assets and current liabilities an optimal level.

Here an optimal level means that the element of working capital should not increase

neither decrease than the requirements, because both levels of working capital may

harmful to the business. Decreasing account receivable referring that company has

limited credit sale which ultimately effects on profitability. Decreasing the inventory of a

firm may lose demand of the customers and hence the cause of reducing the revenue of

the business. Similarly, too much cash can cause of mismanagement and idle cash thus

effect on investor’s investment. According to Shakoor, Khan and Nawab (September

2012), to decreasing accounts receivable, a firm may lesser credit sales which lead to

lost sales thus reducing the profit and to minimizing inventory may lead to lost sales by

stock-outs. Therefore the managements should maintain an optimal level of working

capital on the continuous base. Because the only optimal level of working capital can

add values in the business day to day activities. Deloof in his paper (2003), the firm

should try to keep an optimal level of working capital that maximizes their value.

To maintain the element of working capital at a favorable level the financial

management of a company should have to keep an eye on those factors which effect

the optimal level of working capital .There are certain internal and external factors that
effect on the optimal level of working capital. Factors that affect working capital

management consist on Economic and business environment, Industrial effects,

Legislation, Competition, Financing regulations, Managerial practice/ Working capital

policy, Investment policy, Supply chain and production management, Inventory

management, Payable management, and Firm size (Chaudhry & Ahmad,2015). These

factors can effect working capital management by different dimension. Among these

factors, the corporate governance is very important factors that impact on working

capital management.

Cadbury (1992) defined corporate governance as “the system by which

companies are directed and controlled”. According to the Australian standard (2003),

the corporate governance is considered the process by which corporation is directed

and controlled. Corporate governance is the process, structure, and mechanism which

ensure value for the firm shareholders and enhance the performance of firm through

accountability (Velnampy 2003). According to Valnampy and Pratheepkjanth (2012),

found that Good corporate governance practices are important in reducing the risk for

investors attracting investment capital and improving the performance of companies.

Corporate governance is fundamental for economic growth and development because

business is the key for national economic development. In his study, Gomez (2005)

noted, “if enterprise businesses do not prosper, they will stagnant and collapse. If

business enterprises do not prosper, there will be no economic growth; no employment,

no tax paid and invariably the country will not develop.”

Similarly, manufacturing business have also large contribution in national economy so

there must have proper governance for manufacturing business in country. In context,
the manufacturing firms need the better level of working capital managements through

corporate governance practices to achieve goals of business. Finally the study will be

examined about corporate governance and its impact on working capital management

of manufacturing firm.

PROBLEM STATEMENT:

Working capital management is an important factor for the firm, especially for

manufacturing firm. According to Arunkmar and Ramanan (2013), working capital

management is vital specially for manufacturing firm, where the major part of assets and

liabilities consist on current assets and current liabilities. Similarly working capital

management consider strategic element of corporate governance. As noted by

Mukhopadhyay (2004), working capital management viewed as life blood for any

economic unit and its management is consider among the most important function of

corporate management. Therefore good corporate governance becomes prerequisites

for national economic development, because corporate businesses are the key factors

for economic growth and development. In order to get investor confidence in the

economy like to other developed countries, the need for good corporate governance in

Pakistan is undeniable. In past few years, corporate governance has become an

important area of research in Pakistan. Cheema, et al. (2003), suggests that corporate

governance can play a significant role for Pakistan to attract foreign investment and

mobilize greater saving through capital provided the corporate governance system is

compatible with the objective of raising external equity capital through capital markets.

There is an increasing interest in analyzing the effect of corporate governance on

company performance in Pakistan but many issues in this area are uncovered. In
particularly the impact of corporate governance on working capital management

specially of manufacturing firm is the central issue in this area which needs in-depth

research.

Research question:

Main question:

Does corporate governance impact on working capital management of manufacturing

firm in Pakistan; Mean’s that, are corporate governance variables statistically significant

values in explaining working capital management?

Sub questions:

1) Is there is any significant relationship between board size and working capital

management?

2) Is there is any significant relationship between board meeting and working capital

management?

3) Is there is any significant relationship between board committee and working

capital management?

1) Are corporate governance variables statistically significant values in explaining

working capital management?

2) If statistically significant value, what is the direction of each variable; Mean’s that is

it a negative relation or positive relationship between variable?


The researcher wants to answer these questions after testing following alternative

hypothesis :

H1: There is significant influence of board size on working capital management.

H2: There is significant influence of board meeting on working capital management.

H3: There is significant influence of board committee on working capital

management. Objective of the study:

The objective of the study consists on general objective and specific objective:

General objective:

The main objective of the study is to determine the impact of corporate governance

on working capital management of the listed manufacturing firms in Pakistan.

Specific objective:

The specific objectives of the study are:

1) To analyze the effect of board size on working capital management of the

manufacturing in Pakistan.

2) To analyze the effect of board meeting on working capital management of the

manufacturing in Pakistan

3) To analyze the effect of board committee on working capital management of the

manufacturing in Pakistan.
Purpose of the study:

The purpose of the study is to find out the relationship between corporate

governance and working capital management of the listed manufacturing firms in

Pakistan over the time span 2010 to 2014. For this purpose the relationship

between the following variables will be examined.

1) The relationship between board size and working capital management of the

firm.

2) The relationship between board meeting and working capital management of

the firm.

3) The relationship between board committee and working capital management

of the firm.

Justification:

Manufacturing is the second largest sector of Pakistan after agriculture sector. So

manufacturing is considering the main contributor in economy of Pakistan.

According to Pakistan economic survey 2014 to 2015, manufacturing is the most

vital component of the industrial sector containing 65.4 percent contribution in the

overall industrial sector and GDP share is 13.3 percent. As an important sector in

the overall economic growth, manufacturing sector required in depth analysis at firm

level.
Working capital management considering the most important ingredient for

manufacturing firms. According to Horne and Wachowitz (2000), working capital

management is vital especially for manufacturing firms, where large part of assets

consist on current assets.

The majority of previous research that had been conducted on working capital

management with relation to firm performance and profitability ,but not much on how

working capital management effect by corporate governance. So the impact of

corporate governance on working capital management relatively less discussed,

especially with respect to manufacturing firms of Pakistan required more depth

study. Therefore, this study will focus on corporate governance and its impact on

working capital management of manufacturing firm in Pakistan.

This study will not only beneficial for corporate sector of Pakistan but it will also

contribute for other developing countries in East Asia. This study will also contribute

information to investors, decision maker, regulators and researchers about firm’s

performance by measuring relationship of corporate governance and working capital

management.

Scope:

The study range will only limit to manufacturing firms in Pakistan. The sample size is

only limited to 25 listed manufacturing firms and not included non-manufacturing

firms. Since the sample of working capital management and corporate governance

limited to manufacturing firms then application of result is only applied on

manufacturing firms. Similarly the sample collection period range of the study will be
limited to 2010 - 2014. For data collection the researcher will use financial statement

and annual report of manufacturing firms in Pakistan.

Due to time limitation the study is unable to measures more variables of corporate

governance and working capital management, but only limited to measure the main

three variables of corporate governance and three variables of working capital

management. The quantitative study will be used to measure these variables with

the boundary of SPSS.

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