Business Research

Semester: Summer 2015 Course Title: Business Research Methods Course Code: BUS 485 Section: 04 Working Capital Management on firm Name & ID Anik Dash Mitun ID :( 1110651) Khairul Hassan pial ID :( 1221477) Iqbal Hossain ID :( 1130153) Iutfar Rahman ID: (1230423) MD.Rejaur Rahman ID: (1220801) Wasim Akhyear ID: (0920687) Md. Showaaib Hossain: (1130334) Md.Nurul Islam 1220342 Introduction: The corporate finance literature has traditionally focused on the study of long-term financial decisions, particularly investments, capital structure, dividends or company valuation decisions. However, short-term assets and liabilities are important components of total assets and need to be carefully analyzed. Management of these short-term assets and liabilities warrants a careful investigation since the working capital management plays an important role in a firm’s profitability and risk as well as its value (Smith, 1980). Efficient management of working capital is a fundamental part of the overall corporate strategy in creating the shareholders’ value. Firms try to keep an optimal level of working capital that maximizes their value (Deloof, 2003; Howorth and Westhead, 2003 and Afza and Nazir, 2007). In general, from the perspective of Chief Financial Officer (CFO), working capital management is a simple and straightforward concept of ensuring the ability of the organization to fund the difference between the short-term assets and short-term liabilities (Harris, 2005). However, a ‘Total’ approach is desired as it can cover all the company’s activities relating to vendor, customer and product (Hall, 2002). In practice, working capital management has become one of the most important issues in the organizations where many financial executives are struggling to identify the basic working capital drivers and an appropriate level of working capital (Lamberson, 1995). Consequently, companies can minimize risk and improve the overall performance by understanding the role and drivers of working capital management. A firm may adopt an aggressive working capital management policy with a low level of current assets as a percentage of total assets, or it may also be used for the financing decisions of the firm in the form of high level of current liabilities as a percentage of total liabilities. Excessive levels of current assets may have a negative effect on the firm’s profitability, whereas a low level of current assets may lead to a lower level of liquidity and stock outs, resulting in difficulties in maintaining smooth operations (Van Horne and Wachowicz, 2004). The main objective of working capital management is to maintain an optimal balance between each of the working capital components. Business success heavily depends on the financial executives’ ability to effectively manage receivables, inventory, and payables (Filbeck and Krueger, 2005). Firms can reduce their financing costs and/or increase the funds available for expansion projects by minimizing the amount of investment tied up in current assets. Most of the financial managers’ time and efforts are allocated towards bringing non-optimal levels of current assets and liabilities back to optimal levels (Lamberson, 1995). An optimal level of working capital would be the one in which a balance is achieved between risk and efficiency. It requires continuous monitoring to maintain proper level in various components of working capital, i.e., cash receivables, inventory and payables, etc. In general, current assets are considered as one of the important components of total assets of a firm. A firm may be able to reduce the investment in fixed assets by renting or leasing plant and machinery, whereas the same policy cannot be followed for the components of working capital. The high level of current assets may reduce the risk of liquidity associated with the opportunity cost of funds that may have been invested in long-term assets. Though the impact of working capital policies on profitability is highly important, only a few empirical studies have been carried out to examine this relationship. This study investigates the potential relationship of aggressive/conservative policies with the accounting and market measures of profitability of Pakistani firms using a panel data set for the period 1998-2005. The present study is expected to contribute to better understand these policies and their impact on profitability. Problem Statement: Working capital management is the functional area of finance that covers all the current accounts of the firm. Working capital management also involves the relationship between a firm’s short - term assets and its short - term liabilities. So, the goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short - term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable, accounts payable and cash. Unfortunately, the available literature suggests that static focusing on working capital management is not extensive in Bangladesh. The study although will not give a clear idea to draw a conclusion about the working capital management policy and practice of Bangladeshi Firms but will definitely give an overall idea about working capital management practice of the particular industry in Bangladesh. To investigate the effect of working capital on firm throw the management of Tobin’s q ratio which is determine different ratio and analysis and firm Size, Growth of the firm, LARG of the firm, GDP growth and TCA and those linking all this variable together to find out the impact on working capital . Purpose of the Study: To study the sources and uses of the working capital. To study the liquidity position through various working capital related ratios To study the working capital components such as receivables accounts, Cash management, Inventory management. To make suggestions based on the finding of the study. To assess the current liability positions and the efficiency with which the overall working capital is managed. To analyze and evaluate receivables management along with its impact on working capital management. To analyze cash position and the efficiency with which the same is managed during the period. To assess the relationship between working capital management and profitability. To assess the impact of working capital management on profitability. Literature Review: Return on assets (ROA) is a financial ratio that shows the percentage of profit that a company earns in relation to its overall resources (total assets). Return on assets is a key profitability ratio which measures the amount of profit made by a company per dollar of its assets. It shows the company's ability to generate profits before leverage, rather than by using leverage. Financial leverage refers to the use of debt to acquire additional assets. Financial leverage is also known as trading on equity. The financial leverage (LVRG) was taken as the debt to equity ratio of each firm for the whole sample period. (Nazir and Afza 2009). Some studies, like Deloof (2003) in his study of large Belgian firms, also considered the ratio of fixed financial assets to total assets as a control variable; however, this variable cannot be included in the present study because of unavailability of data, as most of the firms do not disclose full information in their financial statements. LVRG are found to be significantly associated with the book-based returns on assets which confirm the notion that leverage and growth are strongly correlated with the book value-based performance measures (Deloof, 2003 and Eljelly, 2004). The Stock leverage can be defined as the ratio of total liabilities to total assets. It can be seen as alternative for the residual claim of equity holders. However, the stock leverage may not be a healthy indicator in terms of identifying the firms default risk in near future (Rajan; Zingales, 1995). The earnings are independently and identically distributed, so the leverage remains same in each period (Scott, 1976). The multi period earnings and leverage relationship is examined by Barnea, Haugen, and Talmo, (1987). In their point of view adequate earnings cause brings losses for tax benefits as Raymar (1991) find that the leverage increases with the ratio of operating earnings to value. According to Barnea, Haugen, and Talmo, (1987), the leverage to risk relationship is dependent upon the economy-wide pricing variables while Raymar (1991) comes across the result that optimal leverage generally decreases with business risk simple earnings variability measures would not adequately capture the relation between a firm's business risk and its use of debt. The free cash flow indicators identified in literature are observed as low levels of financial leverage, inadequate valuable investment opportunities; considerable and sustainable cash flows; and high level of diversification (Jensen, 1986). Tobin's Q is a ratio devised by James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets. Normal years”, firms leverage shows negative and significant relation to growth and investment with both high-q and low-q firms. Only one-year capital expenditures growth for low-q firms does not indicate any relation to leverage. This could be due to the seen high increase in capital expenditures growth during the normal years. Low-q firms may simply direct the excess cash more strongly to capital expenditures, which they strongly cut off during abnormal years (especially recession), and now direct the limiting effect of debt to other targets. This together could result in the disappearance of the relation for a short time period; at three-year level the negative relation to leverage is seen again. (Hurme 2010) The growth of firm (GROWTH) is surveyed by variation in its annual sales value with reference to previous year’s sales. Moreover, the financial leverage (LVRG) was taken as the debt to equity ratio of each firm for the whole sample period. Some studies, like (Deloof 2003) in his study of large Belgian firms, also considered the ratio of fixed financial assets to total assets as a control variable. However, this variable cannot be included in the present study because of unavailability of data, as most of the firms do not disclose full information in their financial statements. Finally, since good economic conditions tend to be reflected in a firm’s profitability (Lamberson, 1995), this phenomenon has been controlled for the evolution of the economic cycle using the GDPGR variable, which measures the real annual GDP growth in Pakistan for each of the study year from 1998 to 2005. Growth is found to be significantly associated with the book-based returns on assets which confirm the concept that growth is strongly correlated with the book value-based performance measures (Deloof, 2003 and Eljelly, 2004). Real GDP growth may not affect the returns based on book values; however, investors may react positively to a positive change in the level of economic activity which is in accordance with the findings of (Lamberson 1995).The use of growth as a measure of firm performance is generally based on the belief that growth is a precursor to the attainment of sustainable competitive advantages and profitability (Marksman, 2002). In addition, larger firms have higher rates of survival (Aldrich 1986), and may have the benefits of associated economies of scale. The alternative view is that fast growing firms may visibility difficulties associated with growth that leads to reduced profitability and perhaps financial difficulty. Overall, it is difficult to imagine sustained growth without profitability. Without funding growth through retained earnings, the firm must rely on additional debt or equity finance. The relationship between growth and profitability is therefore an important consideration and to date there has been little agreement on the relationship between these two measures. (MacMillan and Day 1987) considered that rapid growth could lead to higher profitability based on evidence that new firms become more profitable when they enter markets quickly and on a large scale. On the other hand, (Hoy 1992) concluded that the pursuit of high growth may be minimally or even negatively correlated with firm profitability. (Sexton et al 2000) found that firm profitability was correlated with sustainable growth, while (Chandler and Jensen 1992) found that sales growth and profitability were not correlated. Return on assets (ROA) is a financial ratio that shows the percentage of profit a company earns in relation to its overall resources. It is calculated by dividing net income by total assets. Net income is a company’s profit after taxes. Total assets include cash and cash-equivalent items such as receivables, inventories, land, equipment (less depreciation), and patents. ROA is a key profitability ratio that measures the amount of profit made by a company per dollar of its assets. Generally, the higher the ROA, the better the management. ROA gives an indication of the capital intensity of the company, which will depend on the industry. That’s why when using ROA as a comparative measure, it is best to compare it against a company's previous ROA figures or the ROA of a similar company. ROAs over 5% are generally considered good. ROA and Tobin’s q compares the value of a company given by financial markets with the value of a company’s assets. A low q (between 0 and 1) means that the cost to replace a firm’s assets is greater than the value of its stock. This implies that the stock is undervalued. Conversely, a high q (greater than 1) implies that a firm’s stock is more expensive than the replacement cost of its assets, which implies that the stock is overvalued. Tobin’s q where Market Value of Firm (MVF) is the sum of book value of long plus short term and market value of equity. Market value of equity is calculated by multiplying the number of shares outstanding with the current market price of the stock in a particular year. Many researchers have used ROA as the measure of profitability (Amato and Wildor, 1985; Glancey, 1998; Fitzsimmons et al., 2005; Asimakopoulous et al., 2009; Vijayakumar and Devi, 2011) because it truly reflects the positions of the company. It reflects that how much income is earned through the assets of the firm. Bashir (2003) evaluated data of 14 Islamic banks earning profits across 8 Middle Eastern countries during years 1993 to 1998. Linear estimation proved strong positive impact of variables involved. Hassan and Bashir (2003) pooled 8 years financial data of 43 Islamic banks and proved significant positive impact on profitability ratios. Haron and Azmi (2004)statistically proved direct relationship of inflation rate and indirect relationship of real interest rate on ROA of 5 major Islamic banks over a period of 1984-2002. Staikouras and Wood (2004) reviewed the performance of European Banking industry for years 1994-1998. Using ordinary least square method and fixed effects model they concluded that interest rate has a significant positive but growth of GDP exerts significant negative impact on ROA. Goddard, Molyneux, and Wilson (2004)also estimated the profitability of 583 European Union domestic banks where cross sectional regression showed a significant positive effect of GDP on profits. Kosmidou, Tanna, and Pasiouras (2005) focused on profitability of domestic U.K commercial banks. The outcome shows a strong positive relationship of all factors. Athanasoglou, Delis, and Staikouras (2006) appraised year 1998-2002 unbalanced panel of 71-132 South-Eastern European banks by linear regression. The result shows high earnings during peak inflation periods and no noticeable effect of GDP. Later on, Havrylchyk and Jurzyk (2006) proved similar result for Eastern and Central European banks. Wong, Wong, Fong, and Choi (2006) used feasible generalized least square (FGLS) method to estimate results and proved that GDP and inflation have a significant impact on asset returns. Focusing on Indonesian banking industry Anwar and Herwany (2006) found out significant relation of economic growth, inflation rate and real interest rate with ROA at 1% level but not with ROE. Consistent relationship was estimated by Sufian and Habibullah (2010). Saksonova and Solovjova (2011) performed comparative analysis of five largest Latvian commercial banks during period of economic crises. GDP growth had positive contribution to profits, and inflation negatively affected ROA. Few scholars have also provided qualitative proofs of variables affecting the banks’ income. Shaher, Kasawneh, and Salem (2011)distributed 320 questionnaires among bank-related individuals and response proved important association of GDP with earnings. Khrawish (2011) determined the macroeconomic indicators affecting the listed Jordanian banks. Result demonstrated negative impact of GDP and inflation with ROA and ROE. Alper and Anbar (2011) observed the returns of Turkish banks and inferred that GDP growth, real interest rate and inflation rate least effect banks’ assets and equity returns. In a recent study, Sharma and Mani (2012) measured the impact on Indian commercial banks for time period 2006-2011. They report that the effect of GDP and inflation on ROA was negligible. Zeitun (2012)investigated macroeconomic influential factors for banks of Gulf Cooperation Council countries. Cross sectional time series panel data gave proof that GDP is positively related but inflation is negatively related with ROA and ROE ratios. A ratio devised by James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets. The second model is Tobin’s Q model, which relates real investment-to-capital ratio to the ratio of firm value to the replacement cost of existing capital stock (namely average Q)—see Tobin (1969) and Hayashi (1982). Its conceptual genesis is often attributed to the idea of Keynes (1936) that an additional unit of capital (thus investment) is warranted, if the additional unit of capital would raise the value of the firm more than the cost of installing it. In our implementation, we use the average Q that is constructed as the ratio of the market value of equities and credit liabilities with respect to the value of tangible assets. A related paper is by McGrattan and Prescott (2005), who argue that the rise until 2000 of the stock price to GDP ratio is due to lower taxes on corporate distributions to shareholders. Given a stable output/capital ratio, the stock price/GDP also react the behavior of Tobinis q. McGrattan and Prescott focuses on the role of intangible capital and explicit taxes in determining stock price behavior. The alternative focus here is on one form of such intangible capital, human capita, and implicit the inflation tax in determining. Natural log of Firm size (SIZE) this because of the size of the firms affects performance and corporate governance practice .large firms may better performance because they are able to enjoy economic of scale. One the other hand large firm suffer inefficiency resulting in poor performance. Large firm may also have ample resource that may allow them adopt good practice. firm size measured by the logarithm of total assets . Firms with high debt provides who may put pressure on companies to adopt good governance’s practices. Firm size is considered one of the important determinants of effective corporate governance (Pearce and Zahra, 1992; Dalton et al., 1999). However, different arguments are prevalent on the issue whether firms should have large or small size of their boards to boost their value and performance. Jensen (1993) and Lipton and Lorsch (1992) argue that smaller firms are more effective than larger firms. They argue that firms could lead to coordination, communication, and decision-making problems. In addition, larger firm size would lead to the disadvantaged condition where the CEO could easily control the firm(Jensen, 1993). Furthermore, when firm size becomes too large, the board tends to be more symbolic and is less likely to be a part of management process (Hermalin and Weisbach,2003). On the other hand, larger firm size could also bring advantages to the firm. Complex firms have greater advising requirements, and thereby they need to have larger boards (Coleset al., 2008; Klein, 1998). Coles et al. (2008) complex firms as firms that have higher diversification, larger assets, and more relying on debt financing. They also propose that members of larger firm size potentially have more experiences and expertise, so that they can provide better advice to the CEO. In the context of unitary board structure, such firms also need to have more outsiders on the board to provide CEO with better advice (Hermalinand, 1998).A number of studies provide empirical evidence on the influence of board size on firm value or firm performance. Yermack (1996), using a sample comprising 452large industrial firms in the US between 1984 and 1991, finds that an inverse relationship exists between firm size and firm value, as represented by Tobin’s q. The complex firms that have greater advising requirements. They argue that complex firm would benefit from larger board size, especially from independent directors who can provide the CEO with better advice based on their experiences and expertise. Based on a sample of 35 bank holding companies in the US, Adams and Mehran (2004) also find that Tobin’s q. The firm size is significant and positive, particularly in large and complex firms. Another Australian study by Nicholson (2006) also reveals such a positive association. By far, evidence of the association between firm size and firm value from two-tier-board economies is very rare. Van Ees et al. (2003), using a sample comprising 94 Dutch listed firms in 1996, run multivariate regressions separately for supervisory board and management board. They use two performance variables, namely accounting performance of arithmetic average of standardized return on assets, return on sales, and return on equity and market-to-book value of equity. Even though the association between board composition and financial performance is not their main focus, a number of studies in the corporate governance literature have also provided empirical evidence. Their findings on the relationship between firm size and firm performance are also inconclusive. Employing a sample comprising 2,601 US firms, Larckeret al. (2007) document a positive relationship between firm size and ROA. Similar to the results suggested by Nicholson (2006) and Setia-Atmaja (2008), Henry (2008) find a positive association between firm size and Tobin’s q marginally at the 10 percent level. He uses a sample of 116 Australian listed firms and covers eleven-year financial periods from 1992 to2002. The positive association is also documented by Switzer (2007), based on a sample of 94 Canadian small-cap firms from 1997 to 2004. Interestingly, in the context of NewZealand, Reddy et al. (2008) provide evidence that firm size is negatively related to Tobin’s q but is positively associated with ROA. Such evidence from emerging markets is provided by Haniffa and Hudaib (2006) and Singh and Gaur (2009), among others. Similar to the finding of Reddy (2008), they find that firm size has a negative relationship with Tobin’s q and a positive association with Return on assets. Klein (1998) suggests that advisory needs of the CEO increase with the extent to which the firm depends on the environment for resources. Operating cash flows generate by assets will affect continuing firm liquidity. It is not only because of the value of liquidation (Soenen, 1993). Firms with fewer current assets will having problem in continuing their operations while if the current assets are too much, it shows the return on investment is not in perfect condition. (Horne and Wachowicz, 2000). Since optimum cash levels are influenced by the factors outside the preventive concept of treasury, the company must think broad and take serious operational decisions on how to the profit opportunities that are available in cash flow process. Some studies, like (Lamberson 1995) small firms respond to changes in economic activities by changing their working capital requirements and level of current assets and liabilities. Current ratio, current assets to total assets ratio and inventory to total assets ratio were used as a measure of working capital requirement, while the index of annual average coincident economic indicator was used as a measure of economic activity. Contrary to the expectations, the study found that there is a very small relationship between changes in economic conditions and changes in working capital. The ratio of fixed assets to total assets (tangibility) should be an important factor for leverage. Asset tangibility was one of the variables examined by Pandey (2002) study in Malaysia. Using panel data and a two-way fixed effect model, Pandey (2002) conclude that there is a positiv relationship between asset tangibility and leverage in Malaysia(Titman and Wessels ,1988), (Rajan and Zingales 1995). The variables of cash conversion cycle as working capital management criteria, current ratio, current assets to total assets ratio, current liabilities to total assets ratio and total debt to total assets ratio were used. Their result indicates that there is a significant relationship between working capital management and profitability.( Abbasali and Milda 2012) .Working capital is also called net working capital and is defined as current assets less current liabilities (Hillier et al., 2010). Singh and Pandy (2008) suggested that, for the successful working of any business origination, fixed and current assets play a vital role, and that the management of working capital is essential as it has a direct impact on profitability and liquidity.Working capital management concerned with current asset and current liabilities. Profitability and liquidity of a company directly affects current asset and current liabilities. So working capital management is considered as most important component of corporate finance. To show the relevance of working capital there are many factors. As far as a typical manufacturing firm is concerned, it accommodates half of its total assets as current assets. More current asset enhances more return on investment. A firm with fewer holdings of current assets would face immense difficulty to carry on the day to day operations of the company. (Horne and Wachowicz, 2000). Efficient working capital management involves planning and controlling current assets and current liabilities in a manner that eliminates the risk of inability to meet due short term obligations on the one hand and avoid excessive investment in these assets on the other hand (Eljelly, 2004). A central issue in finance is whether leverage affects investment policies. On one side of this issue are those who maintain that a firm’s capital structure is essentially irrelevant. A firm with good projects grows no matter how its balance sheet looks, because it can always find funding. Miller (1991, p. 481) argues that we should not ‘waste our limited worrying capacity on second-order and largely self-correcting problems like financial leveraging’. Theories of optimal capital structure based on the agency costs of managerial discretion suggest that, in some cases, the adverse impact of leverage on growth increases firm value by preventing managers from taking poor projects (Jensen, 1980, Stulz, 1990). Hence, the negative relation between leverage and growth could be due to the fact that leverage restricts managers of firms with poor investment opportunities from investing when they should not. In our sample, the negative relation between leverage and growth holds strongly only for firms with IJW Tobin’s q ratios, or firms that do not have valuable investment opportunities known to outside investors. The fact that leverages lowers the growth of such firms is consistent with the agency costs of managerial discretion view that debt has a disciplinary role. Though several authors have related investment to leverage, they reach conflicting conclusions using approaches that differ substantially from the direct approach used in this paper. First, Whited (i992) shows that investment is more sensitive to cash flow in firms with high leverage than in firms with low leverage. Cantor (1990) shows that investment is more sensitive to earnings for highly levered firms. Kopcke and Howrey (1994) use balance sheet variables as separate regressors in the investment equation, and argue these effects are not important. Opler and Titman (1994) show that sales growth is lower for firms in the three highest deciles of leverage, but especially so within distressed industries. When they split their sample by size, they find that leverage has a positive effect on sales growth for large, highly levered firms that are not in distressed industries. Sharpe (1994) shows that the effect of sales grow on employment depends on leverage. In particular, employment for highly levered firms is less sensitive to sales growth during recessions. The negative correlation between size and q is observed repeatedly throughout the finance literature. Perhaps the most widely cited of these articles is Lang and Stulz (1994). Their study of diversification considers over 600 firms in 1984. The result of interest is derived by estimating a regression of q on a number of explanatory variables, including the ratio of R&D to total assets, a diversification dummy, and firm size. Their results show a negative correlation between size and q: as firms grow larger they become relatively less valuable. Robustness of this result is emphasized in Daines (2001), who studies the relationship between q and the state of incorporation over 47,000 firm-years. The results of his regressions clearly show the coefficient on size is negative and significant. This finding has been documented in international studies, such as Claessens, Djankov, Fan, and Lang (2002), which show a significantly negative relationship between size and relative value in eight Asian economies. A number of authors (Demsetz, 1983) have argued that these results may be subject to an endogeneity bias. It may, in fact, be the case that firm size and q are determined simultaneously to maximize value. Therefore, an observed relationship between these variables may reflect an optimal level, rather than a static correlation. Recent studies have attempted to explore this potential bias. Himmelberg, Hubbard and Palia (1999) use firm fixed effects to reexamine the results in studies such as Morck, Shleifer, and Vishny (1988) and McConnell and Servaes (1990). Coles, Lemmon, and Meschke (2007) reconsider the same literature, but specify a structural model of the firm that alleviates the endogeneity problem and allows for better analysis of the relationship between firm size and q. Both of these articles find that size is negatively correlated to relative value even after controlling for endogeneity. At least within the universe of Compustat firms, there does not seem to be an endogenous connection between firm size and firm value. Firm Size and Governance Mechanisms The purpose of this section is to document evidence in the corporate finance literature regarding the ability of corporate governance mechanisms to reduce agency costs in larger firms. There are many corporate control mechanisms at shareholders’ disposal, should the firm’s management begin to impose intolerable agency costs. Shareholders may appoint a board of directors that exercises more authority over the executives. They may buy a large block of stock, so as to gain greater control over the firm. They may instigate proxy proposals, to change the governance of the firm. Also, shareholders may rely on the market for corporate control to step in and remove self-serving managers. An extensive literature has documented the role of each of these devices in disciplining wayward leadership.4 Boards of Directors There is some existing theory and evidence that boards of directors become weaker monitors as firms become larger. Lipton and Lorsch (1992) and Jensen (1993) argue that a larger board of directors may be less effective. Both cite various reasons why this might be the case, such as free-rider problems, slower decision making, less candid discussions, and biases against risk-taking. Yermack (1996) finds that smaller boards are more successful at governing, as measured by the association between board size and firm value. His findings also show evidence that as companies grow bigger, boards grow bigger. The conclusion that can be drawn from his analysis is that larger firms have larger and thereby less effective boards of directors. The key role of the board is to hire and fire managers to best suit the interests of the shareholders. A Firm is a function of factors that works together to fulfill a specific goal. The ultimate objective of a firm is to be a profitable and to sustain that profitability for a long time. The profitability of a firm can be measured by a financial ratio such as return on assets (ROA). It shows the percentage of how profitable a company's assets are in generating revenue. There are some variables that which is related to the ROA of a firm. In literature, there is a long debate on the risk/return tradeoff between the different working capital policies (Pinches 1991, Brigham and Gapenski 2004, Moyer et. al. 2005, Gitman 2005). More aggressive working capital policies are associated with higher return and higher risk while conservative working capital policies are concerned with the lower risk and return (Carpenter and Johnson 1983, Gardner et al. 1986, Weinraub and Visscher 1998). Greater the investment in current assets, the lower the risk, but also the lower the profitability obtained. Shin and Soenen (1998) analyze the relation between the working capital and profitability for a sample of firms listed on the US stock exchange during the period 1974-1994. Their results show that reducing the level of current assets to a reasonable extent increases firms’ profitability. Filbeck and Krueger (2005) highlighted the importance of efficient working capital management by analyzing the working capital management policies of 32 non-financial industries in USA. According to their findings, significant differences exist between industries in working capital practices over time. More recently, Deloof (2003) analyzes a sample of large Belgian firms during the period 1992-1996. His results confirmed that Belgian firms can improve their profitability by reducing the number of days accounts receivable are outstanding and reducing inventories. Teruel and Solano (2005) suggested that managers can create value by reducing their firm’s number of days accounts receivable and inventories. Similarly, shortening the cash conversion cycle also improves the firm’s profitability. Furthermore, managers can create a positive value for the shareholders by reducing the cash conversion cycle up to an optimal level. Similar studies on working capital and profitability includes Soenen (1993), Smith and Begemann (1997), and Ghosh & Maji (2003). In the light of the above discussion, the present study expects a positive relationship between the degree of aggressiveness and the profitability of the firms. Working capital policy has one of the strongest impacts on the ROA of a firm. The impact of working capital policies on the profitability has been analyzed through accounting measures of profitability. As the decision is related with both the earnings and assets, the ratio of total current assets to Total assets has a very strong relationship with ROA. If the company is making any changes regarding the total current assets, it will surely affect the ROA. The performance of a firm decreases when the investment in working capital is low. It is expected that firm’s profitability and working capital relate positively at low levels of working capital, but negatively with higher levels (Brigham and Houston, 2003). Assets are a very important component of a company. It can be inferred that the company which has a greater level of assets, has a greater earning capability. The firm, with a greater level of assets, is considered as a bigger size firm. So there is a relationship between the size and the profitability of that firm. If a firm is bigger in size, the ROA of that firm will also be better than a comparatively smaller firm. Automobile sector of Pakistan and found that capital structure is negatively correlated with profitability and positively correlated with taxes. Previous studies of the relationship between leverage and growth, such as McConnell and Servaes (1995) and Lang et al. (1996), use pooling regressions and in effect ignore individual firm effects. American Based Research Journal ISSN Online (2304-7151) Vol 1-3distinguish between the impacts of leverage on growth in a firm’s core business, from that in its non-core business. They argue that if leverage is a proxy for growth opportunities, its contractionary impact on investment in the core segment of the firm is much more pronounced than in the non-core segment. Goddard, Tavakoli and Wilson (2005) studied manufacturing and service firms in four European countries for the period 1993–2001. They concluded that firms that increase in size tend to experience reduction in profitability, but an increase in market share was associated with increased profitability on average. Goddard, Molyneux and Wilson (2004) studied the profitability of European banks during the 1990s and found that evidence for any consistent or systematic size-profitability relationship was relatively weak. In order to grow, firms can increase their market share, integrate or diversify into other businesses. Size is therefore related to market share as well as integration and diversification activities in the past. When firms attempt to diversify they often begin by vertical integration (Galbraith, 1983; Harrigan, 1985). However, the relationship between vertical integration and financial performance is unclear. Most research in this area assumes that firms vertically integrate to lower transaction costs (Williamson1975) and thereby increase performance (Harrigan, 195). But some research has shown that vertical integration may increase strategic inflexibility (Harrigan, 195) and both systematic risk and bankruptcy risk (D’Aveni & Ilinitch, 1992), eventually leading to poor performance. Ilinitch & Zeithaml (1995) conclude that the managerial costs of vertical integration can lead to inferior performance. Peyrefitte and Golden (2004) find indications based on studies of the computer hardware industry, that vertical integration is negatively related to performance. A firm’s operating performance is mainly determined by the sales volume of that firm. As the sales level grow, so does the earnings. So the growth rate of sales is an important element of ROA and has a significant level of explanatory power. Simon (1962) was not able to find a statistically significant relation between profitability and firm size. On the other hand, Hall and Weiss (1967) have found a positive relation between firm size and profitability in the study they carried on over Fortune 500 firms. On the contrary, Shepherd (1972) has founda negative relation between firm size and profitability. Whittington (1980) argued that firm profitability is independent from firm size. As a result of their study which used approximately3000 firms’ data from83 sectors between the years of 1979-1987, Fiegenbaum and Karnani (1991) havefound a positive relation between firm size and profitability. In a similar way, Majumdar (1997) has used the data of 1020 firms operating in India. Results of the study have showed that big firms have a higher profitability compared to small firms. But Schneider (1991) has argued on the contrary, that the bigger the firm, the lower the profitability. Özgülbaşet al. (2006) has studied the affect of firm size on performance over the firms operating in Istanbul Stock Exchange between the years of 2000-2005. Theyhave found that big scale firms have a higher performance as a result of their study. In a similar fashion, Jonsson (2007) has studied the relation between profitability and size of the firms operating in Iceland. Results of the analysis have showed that big firms have a higher profitability compared to small firms. Serrasqueiro and Nunes (2008) have studied the relation between the size and performance of big and small scale firms operating in Portugal. They found positive and statistically significant relations between the size and performance of the firms as a result of the study using the data belonging the years 1999-2003. In a similar way, Lee (2009) also has found a positive relation between the size and profitability of the firms operating in USA between the years of 1987-2006. Stierwald (2009) has studied the factors influencing the profitability of 960 big firms operating in Australia between the years of 1995-2005. The result of the study has indicated that firm size affects firm profitability in a positive way. Becker et al. (2010) have studied the affect of firm size on profitability inthe firms operating in manufacturing sector in USA. Results of the study in which the data of the years 1987-2002 have been used showed that negative and statistically significant relations exist between the total assets, total sales and number of employees of the firms and their profitability. Khatap et al. (2011) have studied the relation between performances and corporate governances of 20 firms which have been listed in Karachi Stock Exchange. The results of the study using the data of the period between the years 2005-2009 have showed a positive relation between total assets and ROA, but a negative and statistically not significant relation has been found between ROE and total assets. In addition, Karadeniz and İskenderoğlu (2011) have analyzed the variables affecting the return on assets of the tourism businesses listed in ISE. Results of the study showed that there are positive and statistically significant relations between total assets which has been used as a size indicator and ROA. In a similar way, Salihaand Abdessatar (2011) has studied the factors affecting profitability of 40 firms operating in Tunisia between the years of 1998-2006. As a result of their study, a positive relation has been shown between firm profitability and size. Akbaşand Karaduman (2012) havestudied the affect of firm size on profitability on the firms operating in manufacturing sector, listed in ISE between the years 2005-2011. Results of the study showed that firm size has a positive effect on profitability. Shubita and Alsawalhah (2012) have studied the relation between capital structure and profitability of the industrial businesses listed in Amman stock exchange between the years 2004-2009. As a result of their study, a positive relation has been shown between firm profitability and return on equities. Banchuenvijit (2012) studied factors affecting performances of the firms operating in Vietnam. A positive relation has been found between total sales and profitability of the firms but on the contrary a negative relation has been found between profitability and total assets. Additionally, the author has found statistically not significant results between number of employees and profitability. Leverage shows the level of debt that has risen by the firm relative to the equity. Now the matter fact is that the company will go for debt financing only when it has a greater earning probability. So the amount that has been leveraged has a positive relationship with ROA. Hirshliefer and Thakor (1992) argue that when managers have career concerns; using stock options may actually motivate them to follow a conservative investment policy. Previous studies of the relationship between leverage and growth, such as McConnell and Servaes (1995) and Lang et al. (1996), use pooling regressions and in effect ignore individual firm effects. Leland and Pyle (1977) model also predicts a positive correlation between firm quality and leverage. Similar arguments are presented by Brennan and Kraus (1987); Kale and Noe (1991). Graham (2000) estimates the marginal tax benefit of debt as a function of the amount of interest deducted and calculates total tax benefits of debt by integrating under this function The theories of Jensen (1986), Stulz (1990), and Grossman and Hart (1982) also suggest a negative relationship between leverage and investment, but their arguments are based on agency conflicts between managers and shareholders. Burney, Boyles, and Marcis [2001] discuss the useof the common comparative financial statement approach when the example statements are developed ad hoc during a spontaneous explanation of financial leverage which May arise before capital structure is formally addressed in the course. Luoma and Spiller [2002] discuss teaching financial leverage in the context of accounting education. Primarily arguing for specific coverage of financial leverage in introductory accounting textbooks, they essentially introduce the multi-case simplified financial statements approach common in finance textbooks to their intended audience of accounting educators. Nguyen and Neelakantan used small and medium Vietnamese firms to collect data and found that leverage is positively related to firm growth and firm size, and negatively related to tangibility. As it is explained by Michael Porter that industry presents different pattern of profitability due to different forces that the industry exposed to such as concentration, entry barriers, and growth (Spanos, Zaralis, and Lioukas, 2004). This means that when the macroeconomic condition is declining, then the value of return on equity ratio will also decline because the cash is used for investment. The other findings made by Lawrence, Diewert, and Fox (2004) describe that firm’s profit is affected by the change in productivity, price, and firm’s size. However, to increase the assets to generate more profits, companies might use leverage. One type of leverage that companies use is debt. When debt is used to expand the companies by adding more operational assets, then it can generate more cash flows which are expected to increase the value of return on equity ratio (Brigham and Ehrhardt, 2005). This means that the company’s management can make use of the debt to increase the profit. It also can indicate the ability of company’s management to maximize its operation on assets in making profit (Brigham and Ehrhardt, 2005). Lyandres and Zdhanov (2005) find a positive relationship between leverage and investment for COMPUSTAT firms from 1970–2003. They argue that in a dynamic setting, firms compare the benefits of waiting, as value of real options increase with time, against the cost of rising default risk. Therefore operational efficiency can be achieved by dividing sales or revenue with total assets (Sari, 2007). Lastly, a firm has to do business within a territory of a country. So the condition of business especially sales, investment, debt financing etc. will absolutely depend on the present condition of that country. The economic condition of a country is measured by the GDP. So the growth rate of GDP is an important measure of ROA of firm and has the ability to put an impact on it. One of them is Listiadi (2007) who described that Du Pont analysis to investigate the company’s profitability that uses return on equity analysis is best used to measure the return on stockholder’s capital. Chen and Mahajan (2008) investigated the effects of macroeconomic conditions on corporate liquidity in 45 countries from 1994 to 2005. The results show that macroeconomic variables such as gross domestic product growth rate, inflation, short term interest rate and government deficit affect corporate cash holdings. Company tends to hold more cash when the macro economy is developing, and reduce the cash for investment when the macro economy is declining. Their research founds that when the companies increase their size to increase their productivity, the shareholders will enjoy higher return even though the product price decreases. This means that when the companies size increase, the profit of the companies will also increase. Denis and Denis (2006) also look at the relationship between leverage and investment, but they do it in the context of diversified and focused firms. They argue that in diversified firms, investment is unevenly distributed over the high and low growth segments, and managers have the discretion to allocate debt service burden between different segments. Conceptual Framework: Tobin’s qᵢ= α+β₁(TCA/TA)ᵢ+β₂(SIZE)ᵢ+β₃(GROWTH)ᵢ+β₄(LVRG)ᵢ+β₅(GDPGR)ᵢ+ Ɛ Questions & Hypotheses: Questions Q.1: Is there any impact between the firm size and Tobin’s q and dose it effect working capital? Q.2: Is there any relationship between the firm Total current Assets and Tobin’s q and dose it effect working capital? Q.3: Is there any impact between the firm GROWTH and Tobin’s q and dose it effect working capital? Q.4: Is there any relationship between the firm LAVG and Tobin’s q and dose it effect working capital? Q.5: Is there any impact between the firm GDPGR and Tobin’s q and dose it effect working capital? Hypotheses: Ho1: There is no impact between the firm SIZE and Tobin’s Q and it doesn’t effects working capital. Ha1: There is an impact between the firm SIZE and Tobin’s Q and its effects working capital. Ho2: There is no relationship between the firm TOTAL CURRENT ASSET and Tobin’s Q and it doesn’t effects working capital. Ha2: There is a relationship between the firm TOTAL CURRENT ASSET and Tobin’s Q and its effects working capital. Ho3: There is no impact between the firm GROWTH and Tobin’s Q and it doesn’t effects working capital. Ha3: There is an impact between the firm GROWTH and Tobin’s Q and its effects working capital. Ho4: There is no relationship between the firm LVRG and Tobin’s Q and it doesn’t effects working capital. Ha4: There is a relationship between the firm LVRG and Tobin’s Q and its effects working capital. Ho5: There is no impact between the firm GDPGR and Tobin’s Q and it doesn’t effects working capital. Ha5: There is an impact between the firm GDPGR and Tobin’s Q and its effects working capital. Research Design: Data Collection is an important aspect of any type of research study. There are two sources of data. Primary data collection uses surveys, experiments or direct observations. Secondary data collection may be conducted by collecting information from a diverse source of documents or electronically stored information. This study uses quantitative data for the analysis. All the necessary data that are used in this analysis are collected from secondary sources. Accounting information was collected from Reneta Limited Annual Report 2012 and 2013, The IBN SINA Pharmaceutical Industry Ltd Annual Report 2013 and Square Annual Report 2011-2012 and 2012-2013. Ownership data was collected from in annual report, which is given our sir. Others data are collected from the Balance Sheet Annual Reports. This study undertakes the issue of identifying key variables that influence working capital management and its effect on profitability on Bangladeshi firms. Choice of the variables is influenced by the previous studies on working capital management. All the variables stated below have been used to test the hypotheses of our study. We used the Tobin’s q as the dependent variable. On the same lines, along with working capital variables, the present study has taken into consideration some control variables relating to firms such as the size of the firm, the growth in its sales, and its financial leverage. The size of the firm (SIZE) has been measured by the logarithm of its total assets, as the original large value of total assets may disturb the analysis. The growth of firm (GROWTH) is measured by variation in its annual sales value with reference to previous year’s sales. Moreover, the financial leverage (LVRG) was taken as the debt to equity ratio of each firm for the whole sample period. A study may be viewed as exploratory or formal. Our study is exploratory because of exploratory studies toward loose structure with the objective of discovering future research task. Working capital management is an issue in which finance research is scarce. One possible reason behind this fact might relate to the relative ease with which efficient financial markets correct deviations from optimal working capital policies. However, in less efficient financial markets, pervasive among emerging economies, working capital management is critical for both firms’ performance and survival. The difference in the market’s ability for providing immediate assistance to firms might explain the differential consequences on firms’ profitability and financial distress. The fundamentals of working capital management are the importance of its interaction with financial markets, and how this interaction might explain working capital patterns around the world. There are many kinds of purpose of the study like reporting, descriptive, casual exploratory, casual predictive. Our study is descriptive study because of the purpose of the descriptive study is the finding out who, what, where, when or how much. The corporate finance has traditionally focused on the study of long-term financial decisions. Researchers have examined, in particular, the investment decisions, capital structure, dividends or company valuation decisions, among other topics. However, short-term assets and liabilities are important components of total assets and need to be carefully analyzed. The optimum level of working capital is determined, to a large extent, by the methods adopted by the management. Continuous monitoring is required to maintain optimum levels of various components of working capital, such as cash receivables, inventory and payables. Participant’s perceptual awareness refers to when people in a disguised study perceive that research is being conducted. It may reduce the usefulness of a research design and influence the outcomes of the research. When participants believe that something out of the ordinary is happening, they may behave less naturally. There are three levels of perceptional awareness: Participants perceive no deviations from everyday routines (non-aware, unaffected). Participants perceive deviations, but as unrelated to the researcher (aware, consciously unaffected). Participants perceive deviations as researcher-induced (aware, consciously affected). As our research is mainly based on the secondary data the participant’s perceptual awareness is not a very big deal. Employee participation related to decision-making process based on opportunities to make company and self-related decisions, suggestion collection for the betterment of organization and employee wellbeing as also on appreciation strategy has significant positive correlation with employee performance and perceived organizational performance. Data obtained from organizations through the questionnaires were in the shape of perceptual measures. Normally, instead of perceptual measures, the objective measures are more desirable and they are particularly more consistent. Study design depends greatly on the nature of the research question. In other words, knowing what kind of information the study should collect is a first step in determining how the study will be carried out. A cross-sectional study is an observational one. This means that researchers record information about their subjects without manipulating the study environment. It can be said that cross-sectional studies are carried out at one time point or over a short period. Working capital refers to that kind of capital which is invested for a period less than 1 year. As the time span is short and the research is going to be conducted using the factors such as ROA and Tobin’s q, the data design is also based on historical records of a company. As we are going to take different factors that can be helpful to our studies, we will not make any one of the factors to cross each other. In short, we’d try not to interfere. The benefit of a cross-sectional study design is that it allows researchers to compare many different variables at the same time. So we can examine the research question using different variables. A longitudinal study, like a cross-sectional one, is observational. So, once again, researchers do not interfere with their subjects. However, in a longitudinal study, researchers conduct several observations of the same subjects over a period of time, sometimes lasting many years. So it does not coincide totally with our proposal. The study’s objective is to find out whether working capital management has any significant impact on profitability on Bangladeshi firm. The study applied co-relational research. The process of measurement is central to quantitative research because it provides the fundamental connection between empirical observation and mathematical expression of quantitative relationships. The topical scope for my research is statistical study because it is designed for breadth rather than depth. I used statistical surveys to collect quantitative information from a specific population. My survey is focusing on opinions or factual information depending upon the purpose of my study. In this study I have used many variables like AIP=TCA/TA, AFP=TCL/TA, ROA=NEAT/BVA and Tobin’s q=MVF/BVA. These ratios are calculated on the base of annual reports. It is a policy to measure the current scenario of the firm. From the mathematical calculation we can understand the company’s current financial condition. Aggressive Investment Policy (AIP) results in minimal level of investment in current assets versus fixed assets. On the other hand, an Aggressive Financing Policy (AFP) utilizes higher levels of current liabilities and less long-term debt. The impact of working capital policies on the profitability has been analyzed through accounting measures of profitability as well as market measures of profitability, Return on Assets (ROA) and Tobin’s q. Tobin’s q compares the value of a company given by financial markets with the value of a company’s assets. A low q (between 0 and 1) means that the cost to replace a firm’s assets is greater than the value of its stock. This implies that the stock is undervalued. Conversely, a high q (greater than 1) implies that a firm’s stock is more expensive than the replacement cost of its assets, which implies that the stock is overvalued. Data were mainly collected from secondary sources. The secondary data was collected from company’s annual report, different publications, and websites. In this study, Bangladeshi firms and some private limited companies are chosen. The research environment is mainly based on field conditions and laboratory conditions. The sample of the study consists of all non-financial firms listed on the Dhaka Stock Exchange (DSE). DSE has divided the non-financial firms into various industrial sectors based on their nature of business. In order to research design, a firm must be in business for the whole study period. Furthermore, firms must have complete data for the period 2012-2013. This study used annual financial data of 03 non-financial firms for the period2012-2013. The required financial data for the purpose of the study was obtained from the respective companies’ annual reports and publications of journals. The data regarding annual average market prices was collected from the daily quotations of DSE. 25