Abstract:
The Working Capital Management (WCM) has an important role for the firm’s success
or failure, because it directly affects the overall business health of the firm. This
study examined the impact of WCM on profitability and shareholders’ wealth using
50 companies listed in different sectors on the Colombo Stock Exchange (CSE) for the
period from 2010 to 2015. This sample represents 47% of the selected sectors of CSE.
The profitability of the company is measured using gross operating profit (GOP) and
shareholders wealth measured by Tobin’s Q (TQ) ratio. The WCM is measured using
five independent variables namely stock holding period (SHP), debtors’ collection
period (DCP), creditors’ settlement period (CSP), cash conversion circle (CCC) and
current assets ratio (CAR). Further, three additional variables such as firm size (SIZE),
leverage (LEV) and earning yield (EY) are employed as controlling variables to capture
the impact of other performance of the companies.
The data were analyzed using ordinary least square (OLS) and panel data regression
models. These regression models reveal that there is a significant negative relationship
between CCC and dependent variables (GOP & TQ). Further, this relationship
has been confirmed by the major components of CCC such as SHP, DCP. Firm size
also positively and significantly affects the firm GOP, while negatively affects the TQ.
Further, they revealed that there is a significant positive relationship between LEV and
TQ. The study finds that the shareholders’ wealth and profitability can be increased
through the efficiency of WCM.
