Working Capital Management Strategies and Profitability under Monetary Tightening: Evidence from Listed Textile Spinning Firms in Pakistan

Abstract

This study investigates the impact of aggressive and conservative working capital management (WCM) approach on the profitability of listed textile spinning firms in Pakistan during the period of monetary tightening. The theoretical underpinning is the Liquidity-Profitability Trade-Off Theory, Pecking Order Theory, Risk-Return Theory and Monetary Transmission Theory. It explores the impact of CCC and CR on the OPM and analyzes the moderating impact of State Bank of Pakistan (SBP) policy rate on the WCM profitability relationship. The study employs quantitative panel-data techniques on a decade of data on listed textile spinning firms. Fixed-effects regression is used, supported by the Hausman specification test. The results indicate that the cash conversion cycle has a significantly negative relationship with profitability, i.e. Shorter operating cycles strengthen firms' financial performance. On the contrary, the current ratio has a significant positive impact on profitability, suggesting that the firm with greater liquidity enjoys better operating performance and financial strength. The analysis also reveals that the SBP policy rate has negative association with the profitability and significantly moderates WCM strategies and firm performance relation. That is, tight monetary conditions exacerbate the detrimental impacts of longer cash conversion cycles while improving the profitability advantages of high liquidity buffers. Thus, conservative working capital strategies offer better profitability sustainability during a period of high interest rates and credit constraints. These findings contribute to the working capital literature with an empirical evidence that the effects of liquidity management strategies are context-specific to existing monetary condition and the result offer practical policy implications for the corporate executives and the policy makers in developing economies.