Relationship of working capital management and profitability of the firms - an application of unit root and co-integration test on the various corporate sectors of Pakistan stock exchange

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Umair Baig
Salman Sarwat
Danish Iqbal Godil

Abstract

The main purpose of this research is to find the impact and the long-run relationship of working capital, and profitability in different major sectors of Pakistan stock exchange; for this purpose eight sectors with 95 listed companies selected that can be representative of the Pakistani mindset and practices of the corporate world. For this reason, ROA used as the dependent variable and CCC, CR, QR, WCT ART, APD, ROCE, DR to check the long-run relationship with Firm Performance. OLS is not possible due to the trend in data. In this research unit root test and Penal Co-integration test used for finding the long-run relationship equilibrium. This research paper provides guidelines to corporate practitioners and academia to understand and focus on working capital to improve profitability in the organization. Findings revealed that different sectors have different characteristics of working capital in the long-run equilibrium. This research intends to give future direction for the researcher to develop theories of liquidity and working capital.

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