LIQUIDITY OR LETHARGY? INVESTIGATING THE IMPACT OF WORKING CAPITAL MANAGEMENT ON FIRM VALUE IN EMERGING MARKETS

Abstract

This study revisits the value-enhancing role of Working Capital Management in the context of Pakistan’s manufacturing sector during the period 2018 to 2023, a time marked by economic shocks, post-pandemic recovery, and financial volatility. Drawing on firm level panel data from 157 non financial manufacturing firms listed on the Pakistan Stock Exchange, the research examines the effect of excess net working capital on firm performance, investment activity, stock valuation, and excess returns. A fixed effects panel regression methodology is employed, accounting for firm-specific heterogeneity and time-specific shocks, with clustered standard errors to ensure statistical robustness.The findings reveal that higher excess net working capital is negatively associated with investment capacity, stock performance (measured by market-to-book ratio), and excess return (based on CAPM-adjusted models), suggesting that over investment in current assets erodes firm value. Conversely, modest levels of excess net working capital are positively correlated with return on assets, indicating that operational buffers may enhance efficiency up to an optimal threshold. These results support the Trade Off Theory, Agency Theory and the Resource Based View, confirming that worling capital management is a strategic lever for liquidity optimization, risk mitigation, and shareholder value creation. The study also emphasizes the critical role of digitalization, operating cash flow, and asset growth in enhancing performance during financial uncertainty.This research contributes to the limited post-2018 literature on working capital management in emerging markets and offers practical insights for managers, investors, and policy makers on aligning working capital policies with long-term value maximization.

Keywords:: Working Capital Management; Firm Performance; Investment Efficiency; Excess Return; Stock Valuation; Emerging Markets; Financial Strategy