The Moderating Role of Corporate Governance on the Relationship between Working Capital Management and Firm Performance: An Empirical study on Emerging Economy of Pakistan

Abstract

The study aims to identify the link between working capital management and firms’ financial performance using corporate governance as an interacting factor. Cement sector of Pakistan is selected for the study where fifteen cement companies are sampled for study, listed in Pakistan Stock Exchange. The secondary figures are collected from annual reports, data portal of Pakistan stock exchange and the state bank of Pakistan analysis for the period of 10 years from 2006 to 2015. Net profit margin is used as a proxy of financial performance treating as dependent variable. Cash conversion cycle has been used as proxy for working capital management which was treated as independent variables. Corporate governance index was operationalized as moderating variable, while sales & debt to assets ratio were used as control variables. Ordinary least square, including both fixed & random effects regression models were applied to investigate the connection between dependent, independent and moderating variables. The Hausman test was also used to verify which effect was good fit to our research model, and as per Hausman test results for fixed effects regression was more reliable for this model of study. The results show that working capital management has a negative but significant relation with net profit margin. Corporate governance has a negative but insignificant relation with net profit margin. Interaction of working capital and governance has positive but significant relations with net profit margin of listed cement corporations in Pakistan which supports our hypothesis that the moderation of corporate governance positively and significantly effects the connection of working capital management and firm’s financial performance.