ZAHRA HANIF

SID: 64973
DATE: December 6th, 2022

ASSIGNMENT # 3
PRINCIPLES OF MANAGEMENT

Mediating Role Working Capital Management in Corporate

Governance and Firm’s Performance

1. Summary
Effective management of working capital is a key to the success of any business, it
includes cash, receivables, payables and inventories. The research examines the
mediating role of Working Capital Management in Corporate Governance and a firm’s
accounting performance. The target population of this research is all non-financial
companies listed on Pakistan Stock Exchange which addresses whether foreign-owned
have advantages over domestically-owned firms. The research consists of 192
companies, out of which 96 companies have foreign ownership executing the
measurement of dependent, independent, mediating, and control variables.
Furthermore, the data analysis was done using Multiple Linear regressions (OLS),
assuming homogeneity across the time, and the Panel method, in which data comprises
variables that vary across the time and cross-section. The empirical analysis was
executed by measuring the financial performance of firms listed in the Pakistan Stock
Exchange (ROA, ROE, and Tobin’s Q) with and without the time effect.

2. Write down the problem statement.

The research paper states the problem statement: "Can effective working capital
management enhance a firm’s financial performance?” Firms need capital for their
formation and to perform their daily operations. The paper further explained that a firm's
profitability is a component of the effectual use of working capital. Working capital
management is one of the fundamental policies of corporate governance. A constant
supply of working capital is requisite for the healthy growth of firms. Many researchers
suggest that the type of shareholders taking on monitoring roles have different
dimensions and preferences. To address the issue, the paper examines the relationship
between ownership types and company performance by analyzing variations in
governance mechanisms and their effects on business performance. This research
effort to address this concern in a way that working capital management mediates the
impact of ownership structure on performance. The papers state that the cash
conversion cycle largely affects the firm’s accounting performance. With the data of over
94 firms in Pakistan, the research shows that the firm’s income is negatively caused by
working capital management, which indicates that the higher the investment in
inventory, the lower the profit and extending the cash conversion cycle affects the
reduction in profitability. The paper discovers how foreign and director ownership
changes affect a firm’s financial performance.

3. Find out the variables.

The research used companies' financial data from 2006 to 2018, so the research is
based on secondary data. The sample of this research initially covered all the
non-financial companies with foreign equity holdings. Further, the research began with
the purpose of sampling to sort the population. The research address whether
foreign-owned firms have advantages over domestically-owned firms, so taking the
equal size of totally domestic companies by following random sampling. To find the
mediating effect of working capital management on ownership structure and a firm’s
accounting performance, it was discovered how the change in foreign ownership and
director ownership affects a firm’s financial performance. This was done using the
measurement method of variables and the conceptual framework.

Following is the conceptual framework presented in the research paper:

Measurement of variables:
The research paper shows the measurement of variables through the following types of
variables.

➔ Dependent Variables:
a. ROA (Return on Asset) measures a firm’s profitability. It shows the firm's
productivity on its assets.
b. ROE (Return on Equity): It measures a firm’s profitability. It shows the firm's
productivity from every unit of shareholders' equity.
c. Tobin’s Q ratio: It is a company performance indicator. It shows the market
value of a company asset compared to its book value.

➔ Independent Variables
a. Foreign ownership: is the percentage of equity a foreign investor holds.
b. Director ownership: percentage of equity held by the director of the company.

➔ Mediating Variable:
WCM (working capital management): The cash conversion cycle measures
working capital management.

➔ Control Variable:
Size: Natural logarithm for total asset book value.

4. How was the data collected?

The target population of the research is all non-financial companies listed on Pakistan
Stock Exchange. The sample consisted of 192 companies, out of which 96 companies
had foreign ownership. The data collected in the research was in the framework of
Pakistan’s sugar mills. First, the paper discovered performance to find the mediating
effect of working capital management with ownership structure and a firm’s accounting
of how the change in foreign ownership and director ownership affected a firm’s
financial performance. This data was collected using the measurement of different
variables discussed in the answers.

Hypothesis
According to the research data, the following observations were found.

a. There is the mediating effect of working capital management concerning foreign

and director ownership on return on assets, equity and Tobin’s Q ratio without
time effect.
b. There is the mediating effect of working capital management with Foreign and
director ownership on return on assets, return on equity and Tobin’s Q Ratio with
the time effect.
Data Analysis:
First, the data was collected using data analysis. In the data analysis, first, multiple
linear regressions are used in this research assuming homogeneity across time. This
research uses the different measures of financial performance, financial policies and
market performance as the dependent variables, with foreign ownership and director
ownership as the independent variable. The following regression model is used for pool
OLS.
Secondly, using a panel-specific regression model that comprised variables that vary
across time and cross-section. Panel data may have cross-section effect, period effect,
or both, which are analyzed by fixed effect and/or random effect models.

Empirical Analysis:
The empirical analysis used the following to collect the data:
a. In the financial performance of firms listed in the Pakistan Stock Exchange (ROA,
ROE, and Tobin’s Q) without time effect. It was observed that the partial slope
coefficient of foreign ownership showed that when foreign equity holders
increased by one percent, the firm’s return on asset increased by 6.125 percent,
holding director ownership as constant.
b. The mediating effect of working capital management without time effect was
checked, regressing the percentage of foreign equity and director equity as the
independent variable with the cash conversion cycle as the dependent variable.
c. The mediation effect of working capital management on a firm’s performance with
time effect was checked through pooled regression, fixed effect or random effect.
The pooled OLS estimator ignores the panel structure, does not distinguish
between industries, and overlooks the data’s cross-section and time series
nature.

5. Describe any major steps/solutions proposed.

a. Good governance strategies also help in also helps in increasing the firm
performance.
b. The paper further states that the constant supply of working capital is requisite
for the healthy growth of firms. Directors put effort into effectively deploying the
firm’s resources and cash to deal with daily operations.
c. Good working capital management primes to increase net income.
d. The optimum level of the net trade cycle can maximize the firm’s accounting
performance.
e. The inverse relationship between the cash conversion cycle (CCC) and firm
profitability suggests that a rigid working capital policy can improve the firm’s
profitability.
 f. Managing net working capital turnover following the company's needs can
improve financial performance especially return on equity.
g. Corporate governance should maintain a basic role in the performance of the
organization.
h. The management should ensure stock availability on time and supposes costs
such as warehouse rent, insurance and security expenses, which tend to rise as
the level of inventory increases.

6. Conclusions.

The working capital management policy is typically formulated by directors/managers

and owners. The research concluded that the relationship and impact of ownership on
working capital management, and results indicate that the existence of foreign owners is
significantly likely to improve the efficiency of the working capital policy. Furthermore,
this research also concludes that concerning ownership type, working capital
management has no significant mediating role on the financial performance of firms in
Pakistan. The study uses ROA, ROE and Tobin’s Q as performance measures.
Numerous other performance variables, for instance, earning per share (EPS), Net
income and EVA, can be used.