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Liquidity, Level of Working Capital Investment, and Performance in an Emerging Economy

Author

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  • Sharif N. Ahkam

    (Department of Finance and Accounting, School of Business and Economics, North South University, Bangladesh)

  • Khairul Alom

    (Southeast Business School, Southeast University, Bangladesh)

Abstract

Th research investigates the relationship between current ratio, the level of investment in working capital, and profitability of firms in Bangladesh for the years 1998-2014, employing non-financial firms listed on the Dhaka Stock Exchange (DSE) for analysis. Results show that the more profitable companies tend to be able to better maintain their level of investments in current assets. Quantile regression points to a non-linear relationship between profit performance and working capital. We conclude that firms with better profitability maintain a healthier level of investment in working capital assets, wheres firms with inadequate investment in current assets have no meaningful relationship with performance. If the latter firms get an injection of working capital, then they may be able to move to a state where they can generate reasonable profits. The paper presents a general argument against tweaking working capital levels and recommends focusing on other functions of the business to increase profitability and value.

Suggested Citation

  • Sharif N. Ahkam & Khairul Alom, 2019. "Liquidity, Level of Working Capital Investment, and Performance in an Emerging Economy," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 18(3), pages 307-328, December.
    • Handle: RePEc:ijb:journl:v:18:y:2019:i:3:p:307-328
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    References listed on IDEAS

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    1. Muhammad Azeem Naz & Rizwan Ali & Ramiz Ur Rehman & Collins G. Ntim, 2022. "Corporate governance, working capital management, and firm performance: Some new insights from agency theory," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(5), pages 1448-1461, July.

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    More about this item

    Keywords

    Liquidity; Current Ratio; Working Capital; Quantile Regression; Generalized Method of Moments;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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