Assignment no 2

Subject seminar in finance

The impact of corporate governance on working capital
management Efficiency of American manufacturing firms

Submitted to Dr.shafiullah Jan

Submitted by GROUP F
Rubiya riaz
Salmankhan
Sohaib Ahmad
Obaid

INSTITUTE OF MANAGEMENT SCIENCES HAYATABAD PESHAWAR

Efficient Working Capital Management is necessary for all firms. It refers to the management of
currents assets and current liabilities. These components include receivables, inventory,
payables and cash. When you minimise the Working Capital requirement of the business, it in
turn increases firms’ free cashflows. If there is poor corporate governance leads to inefficient
working capital management and this has a negative effect on shareholder wealth. Previous
studies emphasise on relationships between the following components:

- Output and cash (Nadiri 1969)

- Cash balance and ability to borrow (Dittmar et al, 2003)

- Leverage, size of the firm and cash balance (Saddour, 2006)

- Corporate governance and cash balance (Drobetz and Gruninger, 2007)

This article explores the relationship between corporate governance issues such as CEO tenure,
board size, audit committee etc on working capital and also other measures of efficiency. It
controls for size, growth, internationalization and performance.

Methodology of the paper

The researcher has used correlational and non-experimental design in this study.it is central to
the quantitative study b/c it give us the relation b/w fundamental evidence and mathematical
relationship.

Pooled data: Refers to the combining the data. It can also be refers to the combining the
information rather than the raw data.

Cross sectional data: A type of data collected by observing many subject such as individual,
firms, countries, or region at the one point or period of time.

Heteroscedasticity: Refers to the circumstances in which the variability of the variable is

unequal across the range of values of a second variable that predict it.

Endogeneity: Refers to the situation in which an explanatory variable is correlated with the
error term.

Generalized least square model (GLS): is method used for estimating the unknown
parameter in a linear regression model when there is a certain degree of correlation b/w
residual in the regression model.
Summary of the last section.

The study uses least square model for heteroscedasticity problems with cross section weight, and
regression analysis for endogeneity issues to analyze the data of seven corporations.
Heteroscedasticity is referring to the variation changes in a short time period. For declining
endogeneity issues, the study uses significant factors which influence the efficiency of working
capital management. The significant factors are account receivable, account payable, inventory,
cash conversion cycle, cash conversion, and cash ratio management’s efficiencies.

The study found, that internalization of the company increases the efficiencies of account
receivable, account payable, conversion cycle and inventory managements. Furthermore, the CEO
duality increase the efficiency of account receivable, account payable and cash conversion
managements. In addition, the firm size increase the efficiencies of account payable, cash, and
cash ration managements. Moreover, the CEO tuner increase the efficiencies of cash and cash ratio
managements. The financial performance increases the efficiency of cash, cash ratio and cash
conversion managements. On other side, the board size does not increase cash ratio management
efficiency. In at all, it means that corporate governance increase working capital management
efficiency in American industries. It also shows, that board size is not important in increasing
efficiency of working capital management, thus it does not have any value in American industries.

The study encourages the tradeoff theory of cash holding. It also states, that the CEO tenure
increase the cash management efficiency, thus it is in line with Kyereboah-Coleman (2007) that,
the longer serve of CEO in a company increase his/her positive influence on working capital
management efficiency. The study sample size is small, and only involved to these companies
which are similar to American firms. The future research must have examined generalization of
results outside American companies, and other key factors must be considered from different
countries.