Working Capital Efficiency and Firm Value: Evidence form Pakistani Firms

Abstract

Purpose: We examined the association between the efficiency of working capital and firm value for a sample of 49 firms registered on Karachi Stock Exchange for a period of 2004-2016. Additionally, the effect of financing constraints on this association is also examined. Design: Linear and Fixed Effect regression analysis is used to capture the effect of working capital management on firm value. We follow the model which was developed by the Fama and French and use by Pinkowitz et al. and Wasiuzzaman. Findings: We find that working capital efficiency is important for the firms as it affects the firm value and it improves firm efficiency by reducing the investment in working capital. Further, better management of working capital and firm value association is true for financially constrained firms. While, in case of unconstrained firms it the relationship insignificant. Originality: To the best authors’ knowledge, this is very first study on working capital and firm value in context of Pakistan. Hence this work adds valuable contribution in the scarce literature on working capital management and firm valuation relationship.