Inverted U Shaped Relation of Working Capital and Profitability Role of Cash Holdings; Whole Dilemma via Comparative Study of Pakistani Firms
Keywords:Working Capital, Profitability, Cash levels, Inverted U shaped relation, Pakistan, Comparative Study
AbstractWorking capital is vital element for every business in economy for growth. This Study focuses on relationship between working capital and profitability including extractions of working capitalâ€™s optimal level in both manufacturing and services sector considering 28 Pakistani Firms listing on Stock Exchange of Pakistan. In order to conduct comparative study 18 firms from sugar sector (manufacturing) and 10 from telecom sector (services) are selected. Moreover cash level is taken as moderator and study also includes comparison of firms having positive and negative cash levels for estimation of results. Panel data regressions and Driscoll & Kraay Standard Errors tests are used for evaluation of results. The results confirmed existence of inverted u shaped relation between working capital management and profitability in both sectors. Moreover the results for panel data regressions were significant for Telecom sector but insignificant for sugar sector considering moderator. Conclusively cash levels are dynamic component in working capital management.
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