Does Working Capital Management Influence Operating and Market Risk of Firms?

Ahsan Akbar, Minhas Akbar, Marina Nazir (), Petra Poulova and Samrat Ray
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Ahsan Akbar: Department of Informatics and Quantitative Methods, Faculty of Informatics and Management, University of Hradec Kralove, 500 03 Hradec Králové, Czech Republic
Minhas Akbar: Department of Management Sciences, COMSATS University Islamabad, Sahiwal Campus, Sahiwal 57000, Pakistan
Petra Poulova: Department of Informatics and Quantitative Methods, Faculty of Informatics and Management, University of Hradec Kralove, 500 03 Hradec Králové, Czech Republic
Samrat Ray: The Institute of Industrial Management, Economics and Trade, Peter the Great Saint Petersburg Polytechnic University, Saint Petersburg 195251, Russia

Risks, 2021, vol. 9, issue 11, 1-20

Abstract: Extant empirical studies have predominantly focused on the nexus between working capital management (WCM) and corporate profitability. While there is a dearth of literature on the nexus between WCM and a firm’s risk, the present study examines Pakistani-listed firms coming from 12 diverse industrial segments to observe this association for a time span of ten years (2005–2014). To ensure robustness, we employed a System Generalized Method of Moments (SGMM) regression estimation to investigate the influence of WCM on the operational and market risk for firms. Empirical testing revealed that higher working capital levels were associated with lower volatility in firms’ stock price, which shows that shareholders prefer a conservative working capital policy. Moreover, firms with better cash positions were subject to lesser stock market volatility. In contrast, excess working capital and a larger net trade cycle were associated with increased volatility in the operating income. Besides, firms with lower working capital levels relative to their respective industry experienced fewer fluctuations in their operating profits. Our findings assert that short-term financial management has important ramifications for firms’ operating and market fundamentals. Practical implications are discussed for corporate managers and relevant stakeholders.

Keywords: working capital management; operating risk; market risk; system gmm; listed firms; Pakistan (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:9:y:2021:i:11:p:201-:d:674309

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