Nonlinear impact of Excess Working Capital on the firm performance

Abstract

This research examines the influence of excess net working capital management on business performance in the non-financial/manufacturing industry of Pakistan. Does excess net working capital impact firm value? The relationship between net working capital and business value is explained through a concave association, which signifies that excess net working capital considered as overinvestment and deficit net working capital as underinvestment. To examine this impact, the study uses the net working capital rate as an independent variable, which is net working capital divided by total sales and measures its effect on firm performance measured by return on asset while controlling through variables, them being sales growth, firm size, age, cash flow, and leverage. Utilizing convenience sampling, the targeted population for this study is derived from data of 120 firms traded on the national exchange of Pakistan from 2016 to 2022 providing an overall holistic although generalized view of the market. Utilizing multiple regression models on the panel data, the results for which suggest that when net working capital exceeds an optimal point (overinvestment) and is positive, it negatively impacts firm performance. This result provides valuable insights, that being the existence of optimal levels of net working capital that can be beneficial in the manufacturing industry in regional context.