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Board diversity and working Board

diversity and
capital management strategies: WCM

evidence from energy sector

of Pakistan
Ammar Nawaz Khan, Farzan Yahya and Muhammad Waqas Received 10 September 2021
Revised 9 January 2022
Department of Business Administration, Institute of Southern Punjab, Accepted 17 January 2022
Multan, Pakistan

Abstract
Purpose – This study investigates the mediating role of working capital management (WCM) efficiency
between board diversity (based on gender and financial knowledge) and firm performance. The study further
examines which WCM approach (conservative, moderate, and aggressive) they employ to increase (decrease)
firm performance.
Design/methodology/approach – The study employs listed energy firms of Pakistan over the period 2010
to 2019. The system generalized method of moments estimator and logit model are utilized to estimate the
underlying relationships.
Findings – The results show that WCM efficiency partially mediates the relationship between board financial
expertise (BFE) and firm performance. Nonetheless, the presence of female directors is merely symbolic until
they reach a certain level as only the quadratic term of board gender diversity (BGD) has a significant effect on
firm performance. Female directors do not influence WCM efficiency. The results also demonstrate that BGD
encourages a conservative WCM approach, while BFE encourages a moderate WCM approach. Furthermore,
both conservative and moderate WCM approaches are significantly associated with firm performance.
Practical implications – The findings hold implications for increasing the representation of women and
financial experts on board to improve the capital structure decisions of the energy firms in Pakistan.
Originality/value – This study is the first attempt to explore the mediating role of WCM efficiency between
board diversity and firm performance. To the best of the authors’ knowledge, no previous study has
investigated the effect of BGD and BFE on different WCM approaches distinctly.
Keywords Board gender diversity, Working capital management efficiency, Board financial expertise,
Conservative approach, Aggressive approach
Paper type Research paper

1. Introduction
Sustaining an adequate level of cash flow through efficient working capital management
(WCM) is essential for the survival of firms to satisfy their short-term obligations (Akbar
et al., 2020; Seth et al., 2021). Balanced and efficient management of working capital helps
firms to regain their position during the economic recovery, assists in systematized asset
allocation and maximizes their profits (Louw et al., 2019; Shajar and Farooqi, 2016). However,
these excess cash flows can be embezzled by managers and used for their interests leading to
severe agency conflicts (Yahya et al., 2020).
Strong board governance is one of the effective mechanisms to deal with agency conflicts
and restricts managers from misappropriation of shareholders’ wealth (Assenga et al., 2018).
Boards with certain expertise keep a stringent check over a firm’s payables, receivables, cash
reserves and inventory management (Gill and Biger, 2013). Previous studies reveal that
boards with an appropriate portion of female directors bring useful and unique resources to
Journal of Economic and
JEL Classification — G31, G32, G38, J16 Administrative Sciences
The authors thank the editors (Dr. Ghulam A Arain and Dr Rebecca Abraham), co-editors, and two © Emerald Publishing Limited
1026-4116
anonymous reviewers for their constructive comments. DOI 10.1108/JEAS-09-2021-0183
JEAS the firm (Assenga et al., 2018; Yahya et al., 2021). Agency theorists favor gender-diverse
boards as they protect the interests of multiple shareholders by reducing excessing cash
reserves that eventually restrict the opportunistic behavior of managers (Cambrea et al., 2020;
Ghaleb et al., 2021; Yahya et al., 2020). Accordingly, the presence of women on board (WOB) is
associated with better cash management and WCM efficiency (Kayani et al., 2019).
Besides gender-diverse boards, a certain level of financial expertise of board members
helps firms to make crucial decisions cogently. Board financial expertise (BFE) also brings
financial knowledge and skills to the organization that improves WCM efficiency. BFE also
reduces excess cash holding and allocates those funds to profitable projects (MengYun et al.,
2021). Financial expertise of board facilities firms in understanding complicated business
models by acquiring risk-related and financial transactions information more quickly and
cost-effectively (Gilani et al., 2021; Minton et al., 2014). Grounded on resource dependence and
agency perspective, this study argues that diversified boards with an adequate proportion of
female directors and financial experts play effective monitoring and advising role by
improving earnings quality and WCM efficiency, resulting in high firm’s performance
(Kayani et al., 2019; Zalata et al., 2018).
Although several studies have examined the relationship between board diversity and
firm performance, studies related to board gender diversity (BGD), BFE and WCM are
relatively scarce. Especially in the context of Pakistan where corporate governance (CG)
structures are weak and agency conflict is one of the prominent issues (Yahya and Ghazali,
2017), it is important to explore if BGD and BFE improve a firm’s efficiency through
conclusive WCM strategies. Dynamic relationships among underlying variables are explored
due to the prevalence of endogeneity issues in CG studies (Wintoki et al., 2012). Overlooking
endogeneity issues and dynamic relationships produce spurious estimates (Kayani et al.,
2019). Additionally, this study explicitly considers the energy sector due to its strategic
significance and direct link with the country’s economic activities. Nevertheless, there is a
dearth of literature in the context of the energy sector (Shi, 2019).
It is also not clear in prior literature that what WCM strategies BGD and BFE adopt to
optimally allocate a firm’s resources. Based on their capital needs, firms choose either
aggressive or conservative working capital policies. Conservative WCM is low-risk, low-
return, while aggressive WCM is a high-risk, high-return approach. The aggressive approach
is associated with high profitability as minimizing the investment in working capital and
inventories may reduce insurance and storage costs. Additionally, reducing investments into
working capital may shift funds to more profitable projects. On the other hand, conservative
WCM aims to boost sales by investing in receivables and inventory. Advocates of the
conservative approach believe that it enhances a firm’s profitability by reducing supply
costs, risk of stock-out or other operational disruptions (Altaf and Shah, 2018; Tauringana
and Adjapong Afrifa, 2013). Along with examining the mediating role of WCM efficiency
between board diversity and firm performance, this study contributes to the existing
literature by investigating the effect of BGD and BFE on three WCM strategies (conservative,
moderate and aggressive). The study further evaluated the most appropriate WCM approach
for the better performance of energy firms in Pakistan.

2. Literature review and hypotheses development

Mainly two theories are prominent to underpin our framework, i.e. agency theory and
resource dependence theory. According to agency theory, managers (agents) may pursue
their interests instead of shareholders’ (principals) interests (Fama and Jensen, 1983; Jensen
and Meckling, 1976). To restrict their opportunistic behavior, diversified boards play an
important monitoring role and purpose unique solutions to the complex challenges (Poletti-
Hughes and Briano-Turrent, 2019). Resource dependence theory is also one of the prominent
theories that encourage board diversity as they bring technical, financial and social expertise
to the firm. Thus, boards with a mix of males, females and financial experts drive new Board
outlooks and perspectives (Daily et al., 1999; Hillman et al., 2009). diversity and
WCM
2.1 Board diversity, working capital management efficiency and firm performance
Efficient WCM is vital to business success, while the inefficient handling of cash flows can
fade away the strength of the firm. On the one hand, excessive working capital may lead to
overcapitalization into inventory and fixed assets and may not be rewarded by its revenues.
On the other hand, a dearth of working capital may impede operational efficiency and
interrupt the production process. Thus, balancing both liquidity and growth needs to
enhance shareholders’ value (Singhania and Mehta, 2017). Owing to the immense importance
of WCM efficiency especially for financially constrained firms (Wasiuzzaman, 2015), previous
studies have evaluated certain factors that improve or distort the WCM efficiency.
A strand of literature emerges in the favor of strong CG structures and their ability to
improve WCM and firm performance (Abbas et al., 2019; Coleman et al., 2020; Fiador, 2016;
Gill and Biger, 2013; Kayani et al., 2019; Khan et al., 2021). While studies have empirically
linked audit committee characteristics, the board size, ownership structures and independent
directors with WCM, there is scarce empirical literature related to the relationship between
BGD, BFE and WCM. The effective monitoring role of female directors is highlighted in the
previous literature. WOB restricts opportunistic behavior, rents extraction opportunities and
mitigates the chances of earnings management by reducing the excess cash reserves
(Arioglu, 2020; Cambrea et al., 2020; Zalata et al., 2018). They also reduce the likelihood of
bankruptcy by reducing the cost of capital, lowering leverage and decreasing the cost of
liquidity (Garc
ıa and Herrero, 2021; Loukil et al., 2019). Based on this evidence, we assume
that BGD significantly influences a firm’s performance by effectively managing the liquidity
needs of the firm. Accordingly, the following hypotheses are developed:
H1. WCM efficiency mediates the relationship between BGD and firm performance.
Regulatory bodies around the globe have recognized the importance of BFE after corporate
scandals and financial crises to strengthen CG systems. Boards with a certain level of financial
expertise directly influence key financial decisions including dividend policy (Sarwar et al.,
2018), risk-taking (Minton et al., 2014), earnings quality (Garc
ıa-S
anchez et al., 2017) and
corporate cash holdings (MengYun et al., 2021). Using 100 Pakistani listed companies over the
period 2006–2017, MengYun et al. (2021) revealed a significant and negative effect of BFE on
corporate cash holdings. Since excessive cash holdings provide an opportunity for the
managers to expropriate shareholders’ wealth, paying out dividends or investment in positive
NPV projects may reduce agency conflicts in the organization. Additionally, BFE is associated
with lower liquidity risks (Farber et al., 2018, Khan et al., 2020). Thus, we purported that
financial experts on board pull out firms from financial distress and enhance their
performance by optimally manage cash reserve and working capital of the firm. In accordance
with aforementioned debate, following hypothesis is developed:
H2. WCM efficiency mediates the relationship between BFE and firm performance.
A wide range of empirical literature is inclined toward the view that WOBs are risk-averse.
Gulamhussen and Santa (2015) employed 461 banks from OECD countries and revealed that
BGD enhances performance but negatively affects a firm’s risk-taking. Similarly, Belaounia
et al. (2020) utilized a multinational panel based on 1986 firms from 24 economies and posited
a negative effect of female directors on excessive risk-taking. Based on South Asian
healthcare firms, Yahya et al. (2020) also provided empirical evidence regarding the risk-
averse behavior of WOB. In the context of WCM, Nastiti et al. (2019) asserted that female
executives improve a firm’s profitability by choosing a more conservative working capital
JEAS strategy. Thus, we argue that female directors are more concerned about stock-out or
liquidity risk due to which follow less risky or conservative strategy while managing their
firm’s working capital.
On the other hand, BFE is associated with more risk-taking compared to BGD (Minton
et al., 2014). Given that the cost of capital does not reflect the riskiness of shareholders’ assets,
more risk-taking benefits shareholders (Merton, 1977). Nonetheless, there is also enough
evidence regarding the effective monitoring capability of the BFE. Studies revealed that
board members with financial expertise constraint excessive risk-taking of the firm and
accordingly improve the firm performance in which they serve (Liu and Sun, 2021; Nguyen,
2021). Therefore, our study hypothesized that financial experts take the moderate level of risk
and accordingly choose working capital strategy optimally to meet the current liquidity
needs of the firm. Consequently, the following hypotheses are developed:
H3. BGD is positively related to conservative WCM.
H4. BFE is positively related to moderate WCM.
Firms choose different types of WCM strategies based on their liquidity and market needs.
Fundamentally, a strand of literature has divided these strategies into three types, i.e.
aggressive, moderate and conservative strategies (Pirttil€a et al., 2020). In aggressive policy,
firms utilize short-term debt to meet their funding requirements. An excessive level of
investment in working capital is negatively associated with the firm’s investment portfolio
(Akbar et al., 2020). Although an aggressive strategy is supposed to increase a firm’s
profitability, it also elevates riskiness. On the other hand, a conservative strategy decreases
the firm’s liquidity risk even if they have to decrease the return on investment. Owing to the
pros and cons of both aggressive and conservative WC policies, studies revealed that
firms that optimally manage their working capital by balancing both conservative and
aggressive WCM strategies are more likely to improve their operating and market
performance (Aktas et al., 2015; Pirttil€a et al., 2020). Accordingly, we hypothesize the
following:
H5. Moderate WCM strategy is positively associated with firm performance.

3. Methodology
3.1 Measurement of variables
Firm performance is measured through two proxies, return on assets (ROA) and economic
value added (EVA). ROA indicates the ability of a firm to generate revenue through its assets,
while EVA is the incremental difference in the rate of return over the firm’s cost of capital.
Previous studies observed that EVA is a more accurate firm performance indicator and
attracts more attention from investors compared to financial ratios (Alipour and Pejman,
2015; Geng et al., 2021). EVA is measured using the following formula:
EVA ¼ NOPAT  ðCapital invested 3 WACCÞ (1)

where NOPAT is the net operating profit after tax, capital invested is the total assets minus
current liabilities, and WACC is the weighted average cost of capital.
Board diversity is measured by BGD and BFE. BGD is the percentage of female directors
on the board, while BFE is assessed as the proportion of financial experts having professional
accounting or finance qualifications (Garc
ıa-S
anchez et al., 2017). The efficiency of WCM is
measured using the cash conversion cycle (CCC). Three components are needed to assess
CCC, i.e. days inventory outstanding (DIO) plus days sales outstanding (DSO) minus days
payable outstanding (DPO). The calculation method of CCC is further elaborated in Eq. (2):
 inventory þ accounts receivables  accounts payable Board
CCC ¼ 3 365 (2)
Sales diversity and
Previous studies argued that efficient management of CCC is associated with lesser changes
WCM
of bankruptcy and higher operating performance (Grosse-Ruyken et al., 2011; Zeidan and
Shapir, 2017). The conservative, moderate and aggressive working capital strategies are
measured using dummy variables. A firm is pursuing an aggressive strategy if the CCC is less
than or equal to the 25th percentile, between 25th and 75th percentile CCC is considered
moderate strategy, while more than 75th percentile is conceptualized as a conservative
strategy. A similar methodology to assess conservative (aggressive) WC strategy was
previously adopted by Pirttil€a et al. (2020). To control for omitted variable bias, firm size
(natural log of total assets), firm age (natural log of the number of years since the inception of
the firm) and board size (natural log of the number of board members) are considered control
variables. A summary of the variables is reported in Table 1.

3.2 Data and sample

Energy firms of Pakistan are comprised of refineries, oil and gas exploration, oil and gas
marketing and power generation and distribution firms. Initially, 29 energy firms were
selected from the Pakistan stock exchange over the period 2010 to 2019, however, a total of
241 firm-year observations were retained after eliminating outliers using Cook’s distance and
leverage values. The data of the underlying variables were retrieved from annual reports of
the respective firms.

3.3 Estimation technique and model

The CG literature suggested that spurious regression estimations may be derived if the
endogeneity issue is not dealt with adequate econometric tools. Static panel data models

Variable name Acronym Measurement

Dependent variable
Return on assets ROA Total income/ Average total assets
Economic value added EVA NOPAT – (WACC 3 capital invested)
Conservative WC strategy CWC 1 5 if the value of CCC is equal or greater than 75th percentile,
0 5 otherwise
Moderate WC strategy MWC 1 5 if the value of CCC is between 25th and 75th percentile,
0 5 otherwise
Aggressive WC strategy AWC 1 5 if the value of CCC is equal or less than 25th percentile,
0 5 otherwise
Mediating variable
Working capital management WCME (Inventory þ accounts receivables – accounts payable/
efficiency sales) 3 365
Independent variables
Board gender diversity BGD The proportion of female directors on board
Board financial expertise BFE The proportion of financial experts on board
Control variables
Board size BSIZE Natural log of total board members
Firm age AGE Natural log of the number of years since the inception of the Table 1.
firm Summary of the
Firm size SIZE Natural log of the total assets variables
JEAS such as fixed- or random-effect estimators are not effective in controlling endogeneity bias.
To deal with this issue, the generalized method of moments (GMM) proposed by Blundell
and Bond (1998) finds its place in economics and finance literature. The estimation in two
stages improves estimations if the disturbances show heteroscedasticity. The two-step
GMM model addresses the endogeneity issue by employing lagged explanatory variables
along with the lags of endogenous variables as instruments (Roodman, 2009). The Hansen
test and auto-correlation statistics are reported to address the issue of endogeneity and
serial correlation, respectively. To test our first hypothesis (mediation), we followed the
procedure of Baron and Kenny (1986). Accordingly, the dynamic models are developed
below to test H1 and H2:
FRPit ¼ β0 þ β1 FRPi;t1 þ β2 BODit þ β3 BSIZEit þ β4 AGEit þ β5 SIZEit þ υit þ εit (3)
WCMEit ¼ β0 þ β1 WCMEi;t1 þ β2 BODit þ β3 BSIZEit þ β4 AGEit þ β5 SIZEit þ υit þ εit
(4)
FRPit ¼ β0 þ β1 FRPi;t1 þ β2 WCMEit þ β3 BODit þ β4 BSIZEit þ β5 AGEit þ β6 SIZEit
(5)
þ υit þ εit

where FRP denotes firm performance, BOD denotes board diversity (i.e. BGD and BFE),
BSIZE denotes board size, AGE is firm age, SIZE is firm size, υ denotes individual firm
effects, ε denotes error term, i and t denote firms and time respectively. To test H3 and H4,
a pooled cross-sectional logit model proposed by Stone and Rasp (1991) is utilized as the
two-step GMM model is not suitable for dichotomous dependent variables. Accordingly, the
following model is hypothesized:
WCMSit ¼ β0 þ β1 BODit þ β2 BSIZEit þ β3 AGEit þ β4 SIZEit þ υit þ εit (6)

where WCMS denotes WCM strategy (conservative, moderate and aggressive). To test our
last hypothesis, we developed the following model:
FRPit ¼ β0 þ β1 FRPi;t1 þ β2 WCMSit þ β3 BODit þ β4 BSIZEit þ β5 AGEit þ β6 SIZEit
(7)
þ υit þ εit

The model (Eq. 7) is tested with a two-step system GMM as the dependent variable is on a
continuous scale.

4. Results and discussion

The summary statistics of the study are reported in Table 1. The average ROA is 0.11 with a
standard deviation (S.D.) of 0.12 that indicates moderate profitability with lower variability.
On the other hand, most of the energy firms are not making profits above their cost of capital
as the average EVA is negative with a very large S.D. The mean CCC is 35.57 with a higher
level of variability (S.D. 5 257.91). Around 25% of the firms are following aggressive WC
strategy, 50% moderate, while 25% of energy firms pursue conservative WC strategy. On
average, energy firms of Pakistan are comprised of only 4.2% female directors which are
lower than other sectors (Khan et al., 2019). On the other hand, financial experts in energy
firms are greater than other Pakistani-listed firms (Niazi et al., 2021). Descriptive statistics of
control variables are also reported in Table 2. The central tendency measures indicate the
normality of almost all variables except WCM efficiency and EVA. Since the natural log does
not deal with a negative value, we have utilized the Box–Cox transformation procedure to
transform WCM efficiency and EVA to ensure that our models meet the homoscedasticity
assumption (Li et al., 2013).
Variable Mean S.D. Min Max Skewness Kurtosis
Board
diversity and
ROA 0.107 0.121 0.180 0.890 1.611 7.624 WCM
EVA 1.24Eþ10 4.84Eþ10 3.93Eþ11 7.17Eþ08 5.216 30.623
WCME 35.568 257.904 1815.000 1135.000 2.145 17.929
AWC 0.245 0.431 0.000 1.000 1.194 0.578
MWC 0.506 0.501 0.000 1.000 0.025 2.016
CWC 0.249 0.433 0.000 1.000 1.168 0.640
BGD 0.042 0.076 0.000 0.429 2.012 4.349
BFE 0.329 0.192 0.000 0.769 0.210 0.880
BSIZE 2.246 0.239 1.609 2.708 0.154 0.937
AGE 3.448 0.833 0.690 4.660 0.496 0.013
SIZE 17.969 1.838 13.070 24.040 0.114 1.594 Table 2.
Source(s): Author’s calculations Descriptive statistics

The results of the two-step system GMM revealed a significant but negative effect of BGD on
ROA as reported in Table 3. Furthermore, findings suggest no significant effect of BGD on
EVA (see Table 4). This evidence is consistent with the notion that the representation of WOB
is symbolic in most developing countries. Under public and regulatory pressure, firms may
appoint WOBs, but they do not actively participate in the firm’s decisions (Hoobler et al., 2018;
Main and Gregory-Smith, 2018). Our results are consistent with Conyon and He (2017) and
Ahmad et al. (2020) as they also found a negative effect of BGD on firm performance.
Symbolic management of female directors is also confirmed with the insignificant
relationship between BGD and WCM efficiency, suggesting that WCM does not mediate
the relationship between BGD and firm performance.
On the other hand, the evidence from the two-step system GMM reveals a significant and
positive effect of BFE on firm performance (for both ROA and EVA). This finding is in line
with the agency and resource dependence perspective that financial experts on board bring a
wide range of skills and technical knowledge to the firm and restrict opportunistic behavior of
the managers (Zalata et al., 2018), leading to substantial contribution in firm’s performance.
BFE also contributes proactively to the WCM policies by maintaining the liquidity needs of
the firms. Since the effect of WCM on firm performance is significant in all models, it can be
argued that WCM efficiency partially mediates the relationship between BFE and firm
performance. The insignificant values of AR (2) and Sargan test in all models suggest the
validation of our instruments and the absence of serial correlation.
Following our hypotheses, the results of logit regression show that female directors on
board follow conservative WCM policy while financial experts on board pursue moderate
WCM strategy (see Table 5). Additionally, BFE restricts managers from selecting aggressive
WC strategies. Our findings support the risk-aversion of female directors (Belaounia et al.,
2020; Nastiti et al., 2019; Yahya et al., 2020). In contrast, financial experts optimally monitor
the working capital needs of the firm and guide the firm’s managers to follow a mix of
conservative and aggressive WC policies. Finally, the results reported in Table 6 show that
both conservative and moderate WC policies help energy firms to improve their profitability.
This evidence suggests that energy firms in Pakistan need to maintain a substantial level of
liquidity to meet their shareholders’ needs.

4.1 Robustness checks

The critical mass theory suggested that women are considered “tokens” until their proportion
reaches a substantial level. In male-dominant societies, male counterfeits hinder the ability of
female directors to perform optimally. In board meetings, when women attain a “critical
 JEAS

Table 3.

(firm performance
measured by ROA)
Two-step system GMM
ROA WCME ROA ROA WCME ROA
Variables 1 2 3 4 5 6

Constant 8.141** (2.934) 2.345 (1.655) 8.586*** (2.839) 12.686*** (2.578) 3.899 (0.741) 11.490 (3.440)
L.ROA 0.413*** (0.019) 0.409*** (0.025) 0.445*** (0.011) 0.440** (0.016)
L.WCME 0.644*** (0.013) 0.575*** (0.002)
BGD 0.279*** (0.076) 0.023 (0.048) 0.334*** (0.050)
BFE 0.087*** (0.018) 0.081*** (0.003) 0.084** (0.027)
WCME 0.093* (0.092) 0.089* (0.117)
BSIZE 0.030 (0.043) 0.030 (0.032) 0.021 (0.030) 0.055 (0.038) 0.071*** (0.008) 0.068* (0.060)
AGE 0.052*** (0.013) 0.041*** (0.002) 0.055*** (0.011) 0.053*** (0.014) 0.061*** (0.006) 0.064** (0.012)
SIZE 0.004* (0.002) 0.061*** (0.005) 0.003 (0.004) 0.010*** (0.003) 0.031*** (0.000) 0.006*** (0.007)
Year dummy Yes Yes Yes Yes Yes Yes
Industry dummy Yes Yes Yes Yes Yes Yes
AR (1) 0.085 0.084 0.081 0.077 0.080 0.084
AR (2) 0.968 0.922 0.946 0.805 0.849 0.812
Sargan test 0.730 0.972 0.737 0.453 0.992 0.481
Note(s): *, ** and *** represent significance at 10%, 5% and 1% levels, respectively. Values in parenthesis are standard errors
Source(s): Author’s elaborations
 EVA
Board
Variables 1 2 3 4 diversity and
WCM
Constant 258.450*** (37.249) 255.134*** (69.174) 268.002*** (19.469) 300.081** (90.201)
L.ROA 0.011 (0.018) 0.008 (0.026) 0.033 (0.006) 0.052 (0.028)
BGD 2.835 (0.527) 2.861 (0.825)
BFE 0.643*** (0.067) 1.146*** (0.182)
WCME 1.187** (0.676) 3.061*** (0.372)
BSIZE 4.450*** (0.678) 4.022*** (0.993) 4.103*** (0.507) 3.329*** (0.453)
AGE 0.018 (0.199) 0.072 (0.528) 0.230*** (0.109) 0.080 (0.620)
SIZE 0.472*** (0.039) 0.531*** (0.072) 0.569*** (0.019) 0.728*** (0.017)
Year dummy Yes Yes Yes Yes
Industry dummy Yes Yes Yes Yes
AR (1) 0.041 0.070 0.053 0.074
AR (2) 0.555 0.664 0.720 0.662
Sargan test 0.763 0.594 0.608 0.715 Table 4.
Note(s): *, ** and *** represent significance at 10%, 5% and 1% levels, respectively. Values in parenthesis are Two-step system GMM
standard errors (firm performance
Source(s): Author’s elaborations measured by EVA)

Aggressive Moderate Conservative

Constant 1.599 (1.626) 4.529*** (1.634) 9.524*** (2.197)

BFE 2.541*** (0.886) 3.196*** (0.789) 0.081 (0.987)
BGD 1.797 (1.224) 2.419 (1.053) 2.235* (2.170)
AGE 0.819** (0.271) 0.313* (0.200) 0.940*** (0.260)
SIZE 0.257*** (0.101) 0.189*** (0.077) 0.135* (0.087)
BSIZE 1.296* (0.837) 0.460 (0.735) 2.409*** (0.979)
Pseudo R2 0.113 0.188 0.319 Table 5.
Note(s): *, ** and *** represent significance at 10%, 5% and 1% levels, respectively. Values in parenthesis are Logit regression (board
standard errors diversity and WCM
Source(s): Author’s elaborations strategies)

mass”, then they are considered as individuals rather than “women” (Schwartz-Ziv, 2017;
Yang et al., 2019). To test this proposition, we have added the quadratic term (BGD2) to our
model. The results show that female directors significantly and positively influence firm
performance (ROA) once they reach a certain point (see Table 7). However, their ability to
influence WCM remains insignificant.

5. Conclusion
The study was set out to investigate the relationship between WCM, board diversity and firm
performance in energy firms of Pakistan. Using two-step system GMM estimations, our
findings suggest that BGD negatively influences firm performance while the presence of
female directors provides no significant insight into WCM efficiency. Nonetheless, our
robustness checks reveal that BGD improves a firm’s performance once they reach a certain
level. Contrarily, BFE is found to be a stronger CG mechanism for the energy firms of
Pakistan. BFE significantly improves firm performance by efficiently monitoring WCM.
Additionally, the results provide empirical evidence related to the risk-averse behavior of
female directors as they opt for conservative WC policies. However, BFE chooses a moderate
WC strategy to optimally monitor the firm’s liquidity needs.
 JEAS

Table 6.

performance)
regression (WCM
strategies and firm
Two-step system GMM
ROA EVA
Variables 1 2 3 4 5 6

Constant 6.449** (2.811) 11.797*** (4.046) 16.055*** (2.108) 187.903*** (36.239) 238.508*** (39.766) 154.030*** (59.767)
L.ROA 0.454*** (0.014) 0.432*** (0.020) 0.427*** (0.013)
L.EVA 0.018 (0.016) 0.021* (0.012) 0.008 (0.015)
Aggressive 0.019 (0.020) 0.629* (0.137)
Moderate 0.055*** (0.007) 1.163*** (0.355)
Conservative 0.064*** (0.012) 0.960*** (0.050)
BSIZE 0.086* (0.050) 0.119* (0.074) 0.021 (0.045) 4.891*** (0.784) 3.714*** (0.121) 0.633* (1.348)
AGE 0.091*** (0.016) 0.072*** (0.018) 0.061*** (0.008) 0.410 (0.365) 0.047 (0.261) 0.736** (0.347)
SIZE 0.016*** (0.004) 0.005 (0.004) 0.004 (0.004) 0.744*** (0.056) 0.751*** (0.020) 2.209*** (0.128)
Year dummy Yes Yes Yes Yes Yes Yes
Industry dummy Yes Yes Yes Yes Yes Yes
AR (1) 0.072 0.081 0.070 0.053 0.014 0.019
AR (2) 0.767 0.762 0.610 0.551 0.907 0.819
Sargan test 0.727 0.883 0.852 0.926 0.772 0.802
Note(s): *, ** and *** represent significance at 10%, 5% and 1% levels, respectively. Values in parenthesis are standard errors
Source(s): Author’s elaborations
 ROA WCME ROA EVA EVA
Variables 1 2 3 4 6

Constant 8.828** (3.759) 8.299*** (2.101) 10.528*** (3.140) 252.488*** (53.738) 176.938*** (65.824)
L.ROA 0.414*** (0.017) 0.401*** (0.022) 0.002 (0.020) 0.002 (0.019)
L.WCME 0.436*** (0.039)
BGD 0.150* (0.187) 0.229 (0.067) 0.191* (0.198) 0.660 (1.617) 0.881 (1.429)
BGD2 2.252** (1.028) 0.578* (0.193) 2.661** (1.141) 16.452 (13.063) 1.524 (2.257)
WCME 0.048** (0.091) 1.066** (0.988)
BSIZE 0.002 (0.048) 0.035 (0.033) 0.017 (0.058) 3.654** (1.156) 3.408*** (1.168)
AGE 0.039*** (0.010) 0.002 (0.009) 0.036** (0.014) 0.078 (0.328) 0.358 (0.316)
SIZE 0.002 (0.003) 0.013*** (0.003) 0.003 (0.007) 0.604*** (0.041) 0.560*** (0.081)
Year dummy Yes Yes Yes Yes Yes
Industry dummy Yes Yes Yes Yes Yes
AR (1) 0.077 0.068 0.078 0.045 0.078
AR (2) 0.742 0.609 0.721 0.627 0.757
Sargan test 0.934 0.508 0.938 0.886 0.793
Note(s): *, ** and *** represent significance at 10%, 5% and 1% levels, respectively. Values in parenthesis are standard errors
Source(s): Author’s elaborations
diversity and

regression (BGD2,
WCM
Board

WCM efficiency and

Table 7.

firm performance)
Two-step system GMM
JEAS Several practical implications can be derived from the study. First, regulatory bodies in
Pakistan need to fix a “quota” for WOB (like Western countries), so that they will be able to
add practical value to the organizations. Second, firms should appoint directors with a certain
level of financial knowledge to strengthen the internal control systems of the firm. Third,
energy firms of Pakistan should avoid aggressive WC strategies and optimally maintain their
working capital to enhance shareholder value. Our results suggest that cash-rich firms have
greater internal revenue generation capability and stronger financial standing in the market.
The study also has some limitations. First, we consider only energy firms of Pakistan due
to which the results should be carefully generalized for other sectors. Furthermore, the
generalizability of the study is limited to economies with a similar stage of economic
development. A cross-country study will provide a more holistic view in this regard. Second,
only one measurement of WCM efficiency (i.e. CCC) is considered. More extensive proxies are
available in the literature which can be employed in the future study. Third, only two
measures of board diversity (gender and financial expertise) are considered. Certain
attributes such as religion, experience, age, cultural identity, language, occupation, etc., can
provide more insight into the current domain. Fourth, we have used the system GMM
estimator which is not free from certain biases. It assumes homogeneity of slope coefficients
and ignores cross-sectional dependence. Accordingly, future studies should use second-
generation panel data estimations to deal with such issues.

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Corresponding author
Farzan Yahya can be contacted at: farzan.yahya@yahoo.com

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