Financial Leverage, Working Capital Management and Firm Profitability: Empirical Evidence from Pakistan Stock Exchange

Abstract

This study aims to investigate the working capital management practices and its effects on firms’ profitability with moderating role of leverage. The Generalized Method of Moments estimation technique under fixed effect specification is used to analyze the cross-industries sample of 210 nonfinancial firms listed on Pakistan Stock Exchange. The result showed that receivable collection period and payable payment period have positive significant impact on profitability of firms, on the other hand cash cycle has significant negative impact on profitability of firms, and where as the impact of payable payment period is found insignificant on profitability. In case of moderation of leverage with respect to relationship of working capital with profitability the results showed that leverage weakens this relationship significantly. The study suggests that managers in nonfinancial sector should take into consideration the moderating role of leverage with respect to working capital management.