Determining the effect of working capital policies optimization and market power on firm value: A developing country perspective

Rabia Bashir () and Muhammad Ahmad ()

Asian Economic and Financial Review, 2025, vol. 15, issue 4, 563-579

Abstract: This study examines how optimal working capital policies impact firm value in 184 Pakistani non-financial firms, with market power as a moderating factor. The study uses panel data from 2011 to 2023 and the Kruskal-Wallis test to look for patterns in working capital policies. It also employs the Generalized Method of Moments (GMM) to address endogeneity. Working capital policies are measured through investment policy (IP), finance policy (FP), and cash conversion cycle (CCC), while market power is assessed using the Herfindahl-Hirschman Index. Firm value is measured via Tobin’s q (TQ) and the market-to-book ratio (MB). IP and CCC significantly impact firm value, whereas FP has a negative effect. Conservative IP, extended cash conversion cycles beyond optimal levels, and conservative financing all enhance firm value. Market power weakens the positive impact of IP on firm value but amplifies the benefits of FP and CCC. The findings of the study support trade-off theory. Conservative IP and aggressive FP increase firm value. The study provides financial managers with insights to align working capital strategies with market power and equips policymakers with tools to enhance shareholder value.

Keywords: Cash conversion cycle; Financing policy; Firm value; GMM; Investment policy; Market power; Working capital policies. (search for similar items in EconPapers)
Date: 2025
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